Investing in International Stocks

Where to Invest your Money in 2022

Building wealth underpins the American dream. Whether it's paying for a kid's education, securing a comfortable retirement, or attaining life-changing

 financial independence, what you invest in plays a huge role in your success. It's not just about picking winning stocks, or stocks vs. bonds, either. It's truly making appropriate investment decisions based on your goals. Or more specifically, when you will be relying on the proceeds from your investments.

Let's take a closer look at some of the most popular investment vehicles. They may not all be appropriate for you today, but over time, the best investments for your needs can change. Let's dig in.

• Stocks
• Bonds
• Real estate
• Tax-advantaged accounts, such as retirement accounts

Why stocks are good investments for almost everyone

Almost everyone should own stocks. That's because stocks have consistently proven the best way for the average person to build wealth over the long term. U.S. stocks have delivered better returns than bonds, savings yields, and gold over the past four decades. Stocks have outperformed most investment classes over almost every 10-year period in the past century.

Why have U.S. stocks proven such great investments? Because as a stockholder, you own a business; as that business gets bigger and more profitable, and as the global economy grows, you own a business that becomes more valuable. In many cases, shareholders also earn a dividend.

We can use the past dozen years as an example. Even across two of the most brutal recessions in history, the SPDR S&P 500 ETF (NYSEMKT:SPY), an excellent proxy for the stock market as a whole, has delivered better returns than gold or bonds:

This is why stocks should make up the foundation for most people's portfolios. What varies from one person to the next is how much stock makes sense.

For example, someone in their 30s saving for retirement can ride out many decades of market volatility and should own almost entirely stocks. Someone in their 70s should own some stocks for growth; the average 70-something American will live into their 80s, but they should protect assets they'll need in the next five years by investing bonds and holding cash.

There are two main risks with stocks:

• Volatility: Stock prices can swing broadly over very short periods. This creates risk if you need to sell your stocks in a short period of time.
• Permanent losses: Stockholders are business owners, and sometimes businesses fail. If a company goes bankrupt, bond owners, contractors, vendors, and suppliers stand to get repaid first. Stockholders get whatever -- if anything -- is left.

You can limit your risk to the two things above by understanding what your financial goals are.

Managing volatility

If you have a kid heading off to college in a year or two, or if you're retiring in a few years, your goal should no longer be maximizing growth -- instead, it should be protecting your capital. It's time to shift the money you'll need in the next several years out of stocks, and into bonds and cash.

If your goals are still years and years in the future, you can hedge against volatility by doing nothing. Even through two of the worst market crashes in history, stocks delivered incredible returns for investors who bought and held.

Avoiding permanent losses

The best way to avoid permanent losses is to own a diversified portfolio, without too much of your wealth concentrated in any one company, industry, or end market. This diversification will help limit your losses to a few bad stock picks, while your best winners will more than make up for their losses.

Think about it this way: If you invest the same amount in 20 stocks and one goes bankrupt, the most you can lose is 5% of your capital. Now let's say one of those stocks goes up 2,000% in value, it makes up for not just that one loser, but would double the value of your entire portfolio. Diversification can protect you from permanent losses and give you exposure to more wealth-building stocks.

QUIZ

What's your risk tolerance?

Why you should invest in bonds

Over the long term, growing wealth is the most important step. But once you've built that wealth and get closer to your financial goal, bonds, which are loans to a company or government, can help you keep it.

There are three main kinds of bonds:

• Corporate bonds, issued by companies.
• Municipal bonds, issued by state and local governments.
• Treasury notes, bonds, and bills, issued by the U.S. government.

Here is a recent example of how bonds can be useful investments, using the Vanguard Total Bond Market ETF (NASDAQ:BND), which owns short- and long-term bonds, and the iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY), which owns the most stable treasury bonds, compared to the SPDR S&P 500 ETF Trust:

As the chart shows, while stocks were crashing hard and fast, bonds held up much better, because a bond’s worth -- the face value, plus interest promised -- is easy to calculate, thus far less volatile.

As you get closer to your financial goals, owning bonds that match up with your timeline will protect assets you'll be counting on in the short term.

Stocks

Research companies and invest in individual stocks.

Index funds

Invest in index funds for a more passive approach, compared to buying individual stocks.

Bonds

Invest in bonds for predictable, more stable returns.

Retirement accounts

Grow your money over long periods of time, either passively or actively.

Why and how to invest in real estate

Real estate investing might seem out of reach for most people. And if you mean buying an entire commercial property, that's true. However, there are ways for people at almost every financial level to invest in and make money from real estate.

Moreover, just like owning great companies, owning high-quality, productive real estate can be a wonderful way to build wealth, and in most recessionary periods throughout history, commercial real estate is counter-cyclical to recessions. It's often viewed as a safer, more stable investment than stocks.

Publicly traded REITs, or real estate investment trusts, are the most accessible way to invest in real estate. REITs trade on stock market exchanges just like other public companies. Here are some examples:

• American Tower (NYSE:AMT) owns and manages communications sites, primarily cell phone towers.
• Public Storage (NYSE:PSA) owns almost 3,000 self-storage properties in the U.S. and Europe.
• AvalonBay Communities (NYSE:AVB) is one of the largest apartment and multifamily residential property owners in the U.S.

REITs are excellent investments for income, since they don't pay corporate taxes, as long as they pay out at least 90% of net income in dividends.

It's actually easier to invest in commercial real estate development projects now than ever. In recent years, legislation made it legal for real estate developers to crowdfund capital for real estate projects. As a result, billions of dollars of capital has been raised from individual investors looking to participate in real estate development.

It takes more capital to invest in crowdfunded real estate, and unlike public REITs where you can easily buy or sell shares, once you make your investment you may not be able to touch your capital until the project is completed. Moreover, there's risk that the developer doesn't execute, and you can lose money. But the potential returns and income from real estate are compelling, and have been inaccessible to most people until recently. Crowdfunding is changing that.

Invest in brokerage accounts that reduce taxes

Just as owning the right investments will help you reach your financial goals, where you invest is just as important. The reality is, people don't consider the tax consequences of their investments, which can leave you short of your financial goals.

Simply put, a little bit of tax planning can go a long way. Here are some examples of different kinds of accounts you may want to use on your investing journey. In each of these accounts—except for a taxable brokerage—your investments grow tax free..

Investing Account Type	Account features	Need to know
401(k)	Pre-tax contributions reduce taxes today. Potential employer-matching contributions.	Distributions in retirement are taxed as regular income. Penalties for early withdrawal. $19,500 employee contribution limit in 2020.
SEP IRA/Solo 401(k)	Pre-tax contributions reduce taxes today. Higher contribution limits than IRAs.	Distributions in retirement are taxed as regular income. Penalties for early withdrawal. $57,000 total contribution limit in 2020.
Traditional IRA	Use to rollover 401(k) from former employers. Contribute retirement savings above 401(k) contributions.	Distributions in retirement are taxed as regular income. Penalties for early withdrawal. $6,000 contribution limit in 2020.
Roth IRA	Distributions are also tax free in retirement. Withdraw contributions penalty free.	Contributions are not pre-tax. Penalties for early withdrawal of gains. Contribution limits determined by your income.
Taxable brokerage	Contribute any amount to your account without tax consequences (or benefits). Withdraw money at any time.	Taxes are based on realized events (even if you don't withdraw proceeds), i.e. you may owe taxes on realized capital gains, dividends, and taxable distributions .
Coverdell ESA	More control over investment choices. Withdrawals for qualified education expenses are tax free.	$2,000 annual contribution limit; further limits based on income. Taxes and penalties for nonqualified withdrawals
529 College Savings	Withdrawals for qualified education expenses. Very high contribution limits.	More complicated, varying by state. Fewer investment choices. Taxes and penalties for nonqualified withdrawals.

The biggest takeaway here is that you should choose the appropriate kind of account based on what you're investing for. For instance:

• 401(k) – For employed retirement savers
• SEP IRA/Solo 401(k) – For self-employed retirement savers
• Traditional IRA – For retirement savers
• Roth IRA – For retirement savers
• Taxable brokerage – For savers with additional cash to invest beyond retirement/college savings account needs or limits
• Coverdell ESA – For college savers
• 529 College Savings – For college savers

Here are some more points to keep in mind, based on why you are investing:

• Maximize employer-based 401(k) plans, at least up to the maximum amount your employer will match, is a no-brainer.
• If your earnings allow you to contribute to a Roth IRA, building up tax-free income in retirement is an excellent way to help secure your financial future.
• Use the Roth-like benefits of the Coverdell and 529 college savings plans removes the tax burden, resulting in more cash to pay for education.
• A taxable brokerage account is an excellent tool for other investing goals, or extra cash above retirement account limits.

The bottom line is that everyone’s situation is different. You must consider your investment time horizon, desired return, and risk tolerance to make the best investment decision to reach your financial goals. 

Investing in International Stocks

Whether you’re looking to strengthen your portfolio through diversification or create new avenues to explosive growth, international stocks can be an excellent component in your overall investment portfolio. Rapid expansion for international economies, increasing productivity, and improving standards of living are leading to the rise of a new global middle class, and these trends suggest that the world’s most dramatic economic growth over the next century will occur outside the United States. Allocating a percentage of your portfolio to stocks in international markets is a move many investors should strongly consider.

International stocks to watch

World map showing each stock near the country out of which it is based.

Image by The Motley Fool

1. JD.com

China accounts for roughly half of global e-commerce spending, and its online retail market looks poised for substantial long-term growth. JD.com (NASDAQ:JD) is China’s second-largest online retailer, trailing only Alibaba (NYSE:BABA), the country’s largest business-to-consumer seller. It’s also a business that’s sufficiently differentiated from competitors, thanks to its focus on high-quality products and unmatched fulfillment infrastructure.

2. Yandex

Yandex (NASDAQ:YNDX) is sometimes referred to as “the Google of Russia” because its core business revolves around search engine and digital advertising services. Yandex is one of Russia’s leading artificial intelligence companies, and it also operates rideshare and food delivery businesses, social networks, video platforms, and cloud services.

3. StoneCo

Brazil-based payment-processing company StoneCo (NASDAQ:STNE) is benefiting from the shift away from physical money in favor of digital payments -- or, as it’s sometimes called, “the war on cash.” Brazil’s population of roughly 214 million gives StoneCo a large base of potential users, and the company has the opportunity to expand its services elsewhere in Latin America and South America as the digital payments market grows.

4. Shoprite Holdings

Africa is on track to account for more than half of global population growth through 2050, according to the United Nations, and Shoprite Holdings’ (OTC:SRGH.Y) status as the continent’s largest grocery chain positions it to benefit from economic and demographic tailwinds. The company is headquartered in South Africa and operates roughly 2,900 locations across 14 countries.

5. HDFC Bank

India's largest private sector lender, HDFC Bank (NYSE:HDB), is in a favorable position to benefit as the country’s economy continues to develop. The company has more than 5,600 branches across more than 2,900 cities and towns. HDFC is also a player in the digital payments space and appears poised to benefit from the war on cash.

Should I invest in international stocks & funds?

Foreign markets present opportunities that you miss if your holdings are strictly limited to U.S.-based stocks. While nondomestic companies sometimes come with added risks, international companies tend to be cheaply valued relative to comparable businesses in the U.S.

Many investors prefer to pay more for domestic stocks because business growth in international markets is considered less reliable than growth in the U.S. Another big factor is that most investors simply aren’t as familiar with opportunities in international markets because they have limited personal experience with nondomestic companies -- and because these businesses tend to receive less coverage from U.S. analysts and media outlets.

But with the vast majority of global population growth in coming decades projected to occur outside of the U.S., the associated demographic factors and the industrialization of relatively underdeveloped areas suggest that this century’s biggest economic growth will also happen outside the country.

As the world’s largest economy, the U.S. economy is likely to grow more slowly than countries with smaller, less-developed economies. While the U.S. has a population of roughly 330 million, India and China each have populations of roughly 1.4 billion people, and rising per-capita productivity could allow the economies of both of those countries to surpass the value of the U.S. economy by 2030.

Even a country such as Poland, which is home to roughly 38 million people and has actually seen its population shrink in recent years, could expand its gross domestic product (GDP) at rates that significantly exceed the growth rate of the U.S. GDP. Poland is benefiting from industrialization initiatives and a fast-growing tech sector, and, as with any economy with strong growth, likely creating conditions that benefit most Polish companies.

Of course, domestic companies are working to expand their presence in international markets and should profit from global growth. Investing in foreign stocks is a way to have a direct stake in growth outside the U.S. and to benefit from a broader range of market trends and opportunities.

Types of Stocks

From growth stocks to large-cap stocks and beyond, there are many types of stocks to choose from.

Value Stocks

Learn to make money by identifying value stocks, which are companies whose shares are being sold at bargain prices.

Cyclical Stocks

Discover what makes a stock cyclical and how you can benefit.

Consumer Discretionary Stocks

The Consumer Discretionary sector can be highly cyclical but can be rewarding.

How to trade foreign stocks in the U.S.

As an American, you can gain portfolio exposure to international stocks in a few different ways.

1. Invest in internationally focused funds

The easiest (and perhaps safest) way for you to invest in foreign stocks is by investing in exchange-traded funds (ETFs) or mutual funds that include nondomestic companies.

Buying shares of a fund such as the Vanguard FTSE Europe ETF (NYSEMKT:VGK) gives you a position in more than 1,300 companies on the continent, while the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) confers exposure to more than 1,200 large and mid-size companies from countries including China, India, Brazil, South Korea, and South Africa. Alternatively, a fund such as the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) mostly consists of U.S. companies, but Taiwan Semiconductor Manufacturing (NYSE:TSM) stock is one of its biggest components -- and the fund also includes foreign chipmakers ASML Holding (NASDAQ:ASML) and NXP (NASDAQ:NXPI), among others.

2. Buy American depositary receipts

Some foreign companies list their stocks on U.S. exchanges in addition to their home markets, in which case you can simply purchase shares on the Nasdaq or the New York Stock Exchange (NYSE) through domestic brokerages, just as you would for a U.S.-based company. These shares will usually be in the form of American depositary receipts (ADRs) and represent equity stakes equivalent to a predesignated number of shares of the company’s core stock on its home exchange. For example, an ADR share of the Chinese video-streaming company iQiyi (NASDAQ:IQ) trading on the Nasdaq is roughly equivalent to seven ordinary shares on the Chinese exchange.

You may also have the opportunity to buy ADR stakes in companies that don’t trade on U.S. exchanges through over-the-counter (OTC) markets accessible through your broker. But be aware that ADRs may not offer privileges such as voting rights that are conferred by owning a company’s home-market shares, so you may need to be willing to forgo the prospect of voting as a shareholder in order to acquire stakes in promising international companies.

3. Gain direct international access through a broker

The other main way to invest in foreign stocks is by using a brokerage to obtain direct access to the exchange where the company is listed. A global account with a participating U.S. brokerage is suitable, or you can establish a brokerage account in the country where you intend to trade.

Opening a global account or foreign brokerage account may cause you to incur fees and taxes and face additional regulations much more than you’d expect from a U.S. equity market. Your investment also is not protected by domestic securities laws, and you could face difficulty achieving restitution through a foreign court.

US and foreign banknotes rolled up next to each other

Source: Getty Images

What are the risks of investing in international markets?

While the rewards of investing in international stocks can be high, there are some risks to consider. Political instability in the country can devalue an investment, and the values of currencies fluctuate. Particularly in emerging markets, you may have relatively poor visibility into a company's business operations.

Foreign companies are more likely to fail to meet the communications and reliability expectations of most U.S. investors. Even foreign companies approved by the U.S. Securities and Exchange Commission (SEC) to list ADRs on U.S. exchanges will sometimes fail to meet reporting expectations, so it’s essential to understand how well and by what means an international company communicates with its investors.

Before investing in international stocks, consider how much risk you’re comfortable with taking. While emerging markets grow faster, they also tend to be more volatile, so you may prefer to focus on developed economies. By establishing a clear strategy for your non-domestic portfolio, you are better positioned to endure market turbulence and pursue long-term gains.