What international stocks are and why they belong in a long-term portfolio

International stocks are shares in companies based outside the United States. When you buy them, you own a piece of a business that generates revenue in other currencies and other economies. The reason to hold them alongside U.S. stocks is straightforward: the U.S. market is not the world market. Over any given decade, different regions outperform. A portfolio that holds only U.S. stocks misses those gains and concentrates all your risk in one country's economy, interest rates, and currency.

For a long-term investor, international stocks reduce what's called home country bias — the tendency to own only what feels familiar. The U.S. represents roughly 60% of global stock market value, which means 40% of the world's publicly traded companies trade elsewhere. Holding some of that 40% is a way to own a more balanced slice of global business.

The trade-off is real: international stocks add complexity. You deal with currency fluctuations, different accounting standards, and less familiar company names. But for someone investing over 20 or 30 years, that complexity is worth the diversification benefit.

Key Takeaways

  • International stocks let you own companies in developed markets like Europe and Japan, and emerging markets like India and Brazil, reducing concentration risk in the U.S. market alone.
  • You can buy international stocks through index funds and exchange-traded funds (ETFs) that track entire regions or the whole world, rather than picking individual companies.
  • Currency changes affect your returns — when the dollar weakens, international stock gains are worth more in U.S. dollars, and vice versa.
  • A common starting approach is to hold 20% to 40% of your stock portfolio in international funds, with the rest in U.S. stocks, though the right split depends on your goals and risk tolerance.
  • Developed-market funds (Europe, Japan, Australia) are less volatile than emerging-market funds (China, India, Brazil), so many investors hold both in different proportions.

The difference between developed markets and emerging markets

Developed markets are wealthy, stable countries with long histories of stock trading: Japan, Germany, the United Kingdom, France, Canada, Australia, and the Nordic countries. Their companies are large, profitable, and often pay dividends. Their stock exchanges have been running for decades. Currency swings happen, but the underlying economies don't suddenly collapse. A developed-market international fund moves more slowly than a U.S. stock fund, but it also swings less wildly.

Emerging markets are countries with faster economic growth but less stable institutions: China, India, Brazil, Mexico, Indonesia, and others. Their stock markets can double in a year or fall 40% the next year. A company you buy might be genuinely excellent, or it might face sudden government interference, currency crises, or accounting fraud — the risk of not knowing is higher. Over decades, emerging markets have delivered higher average returns than developed markets, but with much larger year-to-year swings.

Most long-term investors hold both. A typical split might be 70% developed-market international funds and 30% emerging-market funds within the international portion of the portfolio. Someone with a very high risk tolerance and a 30-year horizon might weight emerging markets more heavily. Someone closer to retirement might hold only developed markets or skip international stocks altogether.

How to buy international stocks: funds versus individual stocks

You have two paths: buy funds that hold many international stocks, or pick individual companies. For most long-term investors, funds are the better choice because they spread your money across dozens or hundreds of companies, so one bad pick doesn't sink your returns.

An index fund tracks a published list of stocks — for example, the MSCI EAFE Index (Europe, Australasia, Far East) or the MSCI Emerging Markets Index. Vanguard, Fidelity, and Schwab all offer funds that track these indexes. You buy one fund, and you own a slice of hundreds of companies. The fund's fee is typically 0.08% to 0.20% per year, meaning you pay $8 to $20 annually for every $10,000 invested.

An exchange-traded fund (ETF) works the same way — it tracks an index and holds many stocks — but trades on an exchange like a stock does. You can buy it during market hours and sell it anytime. The most popular international ETFs are VEA (developed markets), VWO (emerging markets), and VXUS (the entire world ex-U.S.). Like index funds, their fees are low, usually under 0.15% per year.

Picking individual international stocks is possible but requires research in a language you may not speak, reading financial statements under different accounting rules, and monitoring companies you don't know well. Most long-term investors skip this and use funds instead.

Currency risk: what happens when the dollar moves

When you own an international stock, you own it in its home currency. A Japanese company's stock price is quoted in yen. A German company's in euros. When you sell, the fund converts that currency back to dollars. If the dollar has weakened against the yen since you bought, your return is higher in dollars. If the dollar has strengthened, your return is lower.

This is called currency risk, and it cuts both ways. In 2022, the dollar strengthened sharply, and international stock funds fell more than U.S. stocks partly because of currency headwinds. In 2023, the dollar weakened, and international stocks benefited from currency tailwinds on top of stock price gains. Over very long periods — 20 years or more — currency swings tend to average out, so they matter less to a buy-and-hold investor than to someone trading in and out.

Some international funds are "hedged," meaning they use financial contracts to lock in the current exchange rate and remove currency risk. Hedged funds are useful if you believe the dollar will strengthen and want to avoid that loss, but they cost slightly more to run (fees are typically 0.20% to 0.30% instead of 0.08% to 0.15%). Most long-term investors skip hedging and accept currency swings as part of owning global stocks.

How much of your portfolio should be international

There is no single right answer, but there are useful starting points. A common rule is to hold international stocks equal to your age — so a 30-year-old holds 30% international, a 50-year-old holds 50%. Another approach is to hold international stocks in proportion to their share of global market value, which is roughly 40% to 45% of the world total. That would mean 40% to 45% of your stock portfolio in international funds.

In practice, most U.S. investors hold 20% to 40% international. This is less than the global market weight, which reflects home country bias, but it's enough to capture diversification benefits. Someone with a 30-year horizon and high risk tolerance might go to 50%. Someone within 10 years of retirement might hold 15% or even zero.

The key is to pick a percentage, invest it in a low-cost fund, and leave it alone. Rebalance once a year if international stocks have grown to 50% of your portfolio and you wanted 30%, but don't chase performance by selling after a bad year or buying after a good one.

Tax treatment of international stocks in taxable and retirement accounts

International stocks held in a taxable brokerage account may generate foreign tax credits. Many countries tax dividends paid to foreign shareholders. When a U.S. investor receives a dividend from a Japanese stock, Japan may withhold 10% to 15% in tax. The fund passes this credit to you, and you can claim it on your U.S. tax return to avoid double taxation. This is automatic — you don't have to do anything — but it's one reason to hold international stocks in tax-advantaged accounts like a 401(k) or IRA when possible.

In a 401(k) or traditional IRA, you don't pay tax on dividends or gains until you withdraw, so foreign tax withholding is less of a concern. In a Roth IRA, you pay no tax on gains ever, which makes it an excellent place for international stocks if you have room. In a taxable account, holding international index funds or ETFs is still fine — the foreign tax credit handles most of the double-taxation issue — but it's one reason to prioritize retirement accounts for international stocks if you're deciding where to invest first.

Common mistakes to avoid when investing internationally

The first mistake is buying individual emerging-market stocks based on a hot tip or a news story about a fast-growing country. China's economy grew 10% per year for decades, but investors who bought individual Chinese stocks often lost money because they picked the wrong companies or bought at the wrong time. A fund spreads that risk across many companies and removes the need to pick winners.

The second mistake is selling after a bad year. International stocks underperformed U.S. stocks for most of the 2010s, and many investors sold their international holdings in frustration. Those who held through 2021 and 2022 saw international stocks recover. A long-term investor should expect periods of 5 to 10 years when international stocks lag, and periods when they lead. Selling after a lag locks in the loss.

The third mistake is overweighting emerging markets because of growth stories. Emerging markets have higher average returns over very long periods, but they also have much higher volatility. An investor who can't tolerate a 50% drawdown should not hold 60% of their international allocation in emerging markets, no matter how fast India's economy is growing.

Frequently Asked Questions

Do I need international stocks if I own U.S. companies that do business overseas?

No, but it's not a substitute. Many large U.S. companies earn 40% to 50% of revenue abroad, so you do get some international exposure. But you're still concentrated in U.S. management, U.S. accounting rules, and U.S. currency. Owning actual international stocks gives you exposure to how foreign economies perform and how foreign companies are run, which is different.

What's the difference between VXUS and VEA plus VWO?

VXUS holds the entire world except the U.S. in one fund. VEA holds developed markets, and VWO holds emerging markets. Buying VEA and VWO separately lets you control the split between developed and emerging — for example, 70% VEA and 30% VWO. Buying VXUS gives you a fixed split (roughly 80% developed, 20% emerging) without having to manage two funds. Both approaches work; VXUS is simpler if you want a single international holding.

Should I avoid international stocks because of geopolitical risk?

Geopolitical risk is real — wars, sanctions, and political instability do affect stock prices. But the U.S. faces geopolitical risk too, and over long periods, diversification across regions reduces the impact of any single country's crisis. A portfolio with no international stocks is more exposed to U.S. political and economic risk, not less exposed to global risk.

Can I buy international stocks directly from a foreign brokerage?

Technically yes, but it's unnecessarily complicated for a long-term investor. You'd need a foreign bank account, deal with currency conversion costs, and manage foreign tax reporting. A U.S. brokerage like Fidelity or Vanguard lets you buy international funds with a single click, handles all currency conversion and tax reporting, and charges lower fees than you'd pay going direct.

What happens to my international stocks if the U.S. dollar collapses?

If the dollar weakens sharply, your international stocks become worth more in dollars — a gain. If the dollar strengthens, they're worth less in dollars — a loss. Over very long periods, currencies don't collapse; they fluctuate. Holding international stocks is actually a hedge against extreme dollar weakness, not a risk from it.