Morningstar: The Importance of Investing Abroad

In a recent interview, Morningstar’s Alex Bryan, director of passive strategies research in North America, offered insights regarding how investors might approach foreign exposure in their portfolios.

Here are some highlights:

  • Even though international stocks tend to be a bit more volatile than U.S. stocks because they are priced in foreign currency, Bryan says, diversifying is important because U.S. stocks go through periods of underperformance relative to international shares. Bryan says that international stocks can help diversify risk relative to local economic factors, interest rates and currencies.
  • Regarding how much home-country bias is reasonable, Bryan says that it depends on an investors level of risk tolerance: “When you do add international stocks,” he said, “you are going to pick up a little bit of volatility from currency risk. But I think a small allocation of about a quarter to a third of your portfolio shouldn’t have a huge impact on the overall portfolio’s volatility” since U.S. and international stocks exhibit low correlation.
  • Although currency fluctuations do add a bit of volatility to international stocks, Bryan argues that over the long term, these fluctuations tend to level out. “But if you want to take that risk off the table,” he adds, “and you’re comfortable paying a slightly higher fee, currency hedging might be a way to go.”