International Investing: Diversify Globally With Developed and Emerging Markets
The US stock market is 60% of global market cap. The other 40% is in other countries. By investing only in US stocks, you miss growth from Europe, Asia, and emerging economies. Here's how to invest globally.
International investing means buying stocks, bonds, or funds from companies and governments outside your home country. The primary motivation is diversification — different countries experience different economic cycles, and their markets do not always move in sync with your domestic market. International investing also provides access to faster-growing economies (emerging markets like China, India, Brazil) and industries that may be underrepresented in your home market. While the US stock market has outperformed most international markets over the past decade, there have been long periods where international stocks dominated, particularly the 2000s when emerging markets soared while US stocks went nowhere. Understand stock market fundamentals →
Real-world example: A portfolio of 70% VTI (US total market) + 30% VXUS (total international) from 2000-2009: US returned -1% annualized (the lost decade). Emerging markets returned +8% annualized. International holdings boosted returns significantly during the US bear market. From 2010-2023: US outperformed. The lesson is that diversification means always holding some assets that are underperforming — and that is the price of protection. Learn how to build a diversified portfolio →
Why Invest Internationally?
The strongest argument for international investing is diversification. Different economies operate on different cycles: when the US is in recession, emerging markets may be booming, and vice versa. International stocks also provide valuation opportunities — certain markets consistently trade at lower valuations than the US, offering higher expected returns over the long term. Currency exposure is another factor: if the US dollar weakens, your foreign investments become worth more in dollar terms, providing a natural hedge. The market cap argument is also compelling: US stocks make up about 60% of global market capitalization, meaning a purely US portfolio ignores 40% of the world's investment opportunities. Use low-cost index funds for international exposure →
Developed vs Emerging vs Frontier Markets
Developed Markets
Developed markets include the US, Canada, UK, Japan, Germany, France, Australia, Switzerland, and Singapore. These countries have stable political systems, mature economies, strong regulatory frameworks, and deep, liquid stock markets. Returns tend to be more moderate but volatility is lower. Developed markets ex-US are accessible through ETFs like VEA (Vanguard FTSE Developed Markets) and IEFA (iShares Core MSCI EAFE).
Emerging Markets
Emerging markets include China, India, Brazil, Taiwan, South Korea, South Africa, Mexico, and Indonesia. These economies are growing faster than developed markets but come with higher volatility, less regulatory oversight, currency risk, and political instability. The tradeoff is higher potential returns — emerging markets often trade at lower valuations and have faster GDP growth. Access them through VWO (Vanguard FTSE Emerging Markets) or IEMG (iShares Core MSCI Emerging Markets). Dive deeper into emerging market investing →
Frontier Markets
Frontier markets such as Vietnam, Nigeria, Bangladesh, Pakistan, and Kenya represent the earliest stage of market development. These markets offer the highest growth potential but also the highest risks — low liquidity, political instability, currency controls, and limited investor protections. Only experienced investors with high risk tolerance should consider frontier markets, and even then, as a small allocation (1-5% of portfolio).
Understanding Currency Risk
When you invest internationally, your returns come from two sources: the performance of the underlying assets and changes in currency exchange rates. If the US dollar strengthens against foreign currencies, your international investments become worth less in dollar terms even if the local stocks went up. Currency risk cuts both ways — a weakening dollar amplifies international returns. Unhedged ETFs (like VXUS) maintain this currency exposure as a natural diversifier. Hedged ETFs (like HEFA for developed markets) use derivatives to neutralize currency effects, which adds costs but removes the currency variable. For long-term investors, unhedged exposure is generally recommended because currency fluctuations tend to balance out over time and provide additional diversification. Compare international vs S&P 500 returns →
How to Invest Internationally
The simplest and most cost-effective way to invest internationally is through ETFs that track broad international indices. VXUS (Vanguard Total International Stock) gives you exposure to both developed and emerging markets in a single fund with a low expense ratio. For more targeted exposure, VEA covers developed markets ex-US, VWO covers emerging markets, and individual country ETFs like EWG (Germany), EWJ (Japan), FXI (China large-caps), or EEM (broader emerging markets) allow regional tilts. International bonds also add diversification — BNDX (Vanguard Total International Bond) provides non-US government bond exposure. Rebalancing annually helps maintain your target allocation and forces you to sell what has done well to buy what has lagged, which automatically enforces a buy-low, sell-high discipline.
Recommended International Allocation
The typical recommendation is 20-40% of your stock portfolio allocated to international stocks. The exact percentage depends on your investment philosophy and comfort level. The market-cap-weighted approach suggests roughly 60% US and 40% international. Jack Bogle, founder of Vanguard, suggested 20% of stocks in international as sufficient. Vanguard's own target-date funds allocate about 40% of stocks to international. The key is picking a percentage and sticking with it through all market conditions — the worst thing you can do is abandon international after a period of underperformance, which is precisely when you should be adding to it.
Why invest internationally when the US market performs better?
The US has outperformed international markets for extended periods, but past performance does not predict future returns. From 2000-2009, US stocks returned -1% annualized while emerging markets returned +8% annualized. Japan's market dominated in the 1980s, then stagnated for 30 years. The US could experience a similar prolonged underperformance. International investing is not about chasing past returns — it is about diversification and ensuring you are not betting everything on the continued outperformance of one country's market.
What is the difference between developed and emerging markets?
Developed markets have mature economies, stable governments, strong regulatory systems, and deep liquid stock markets. Emerging markets are developing economies with faster growth potential but higher risks including political instability, weaker regulations, currency volatility, and less market liquidity. The tradeoff is higher potential returns in emerging markets versus stability and lower costs in developed markets.
How do I manage currency risk in international investing?
You can use hedged ETFs that neutralize currency effects through derivatives, or unhedged ETFs that maintain currency exposure. Most long-term investors use unhedged funds because currency fluctuations balance out over decades and provide diversification benefits. Hedging adds costs and can work against you if the dollar weakens. For a long-term buy-and-hold strategy, unhedged international exposure is generally recommended.
What percentage of my portfolio should be in international stocks?
Most experts recommend 20-40% of your stock allocation for international stocks. Vanguard's target-date funds use about 40%. Jack Bogle suggested 20%. The market-cap-weighted approach would put 40% in international. Choose a percentage you can maintain through underperformance periods and stick with it through all market conditions.