Over the past year, it’s been especially easy to get stuck in a rut investing only in U.S. equities. The U.S. stock market has been a top performer, encouraging American investors to keep their money at home. However, analysts are recommending international stocks to buy this year as growth opportunities abroad are starting to look more promising.
While 2019 was a great year to keep your dollars in the U.S., recognizing “home bias” is an important part of setting your portfolio up for long-term sucess. According to Geoffrey Smith, a clinical assistant professor in the W.P. Carey School of Business, there are several reasons investors are hesitant to invest abroad. Transaction costs, familiarity, currency risks and a focus on domestic inflation, he says, are all reasons many are unwilling to look to international investments.
But Smith also said that some of the benefits international investments offer offset those risks.
The big benefit is risk diversification. Foreign stock returns have a low correlation with domestic stock returns. Investors can use this to reduce the overall risk of their portfolios.
With that in mind, here’s a look at three stocks to diversify your portfolio beyond the boundaries of the U.S.
Stocks to Buy: Royal Dutch Shell (RDS.A, RDS.B)
Income investors rejoice — many foreign investments offer impressive dividend yields that outpace those offered in the U.S. A comparison of dividend yields across major markets around the world showed that the U.S. actually lags many of its peers. The S&P 500 had a yield of just 1.8% compared to the United Kingdom’s FTSE 100’s yield of 4.6% and Brazil’s Ibovespa’s 2.9%.
Europe is a great place to look for dividend stocks to buy. It offers a wide range of industries all sporting impressive yields. My pick in this space is The Netherlands’ Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B), which offers a 7.2% dividend yield. That’s not only the highest among the majors, but the firm also boasts one of the largest buyback programs as well.
To say RDS.A stock is shareholder friendly would be an understatement. However, the firm’s immense size and asset portfolio also makes it a great long-term pick. That’s true despite ongoing uncertainty in the energy space. As worries about oil prices persist, Royal Dutch Shell is trading near its 52-week low, making now a good time to pick it up.
It may seem counterintuitive to invest in China right now. After all, the nation hadn’t yet recovered from its trade war with the U.S. when the coronavirus struck and ground the economy to a halt. While the virus remains unconfined, most agree that its impact on China’s economy and overall global growth is likely to be temporary.
So where should you put your money? There are a lot of good choices out there but the best in my opinion is Alibaba (NYSE:BABA). With the coronavirus weighing on Chinese stocks right now, this could be one of the few times to pick up BABA stock at a discount.
History tells us that a virus outbreak like this one will likely weigh on retail sales. But history also says that once it’s contained, retail sales will pick back up again. Not only that, but BABA is an online marketplace — it’s been likened to Amazon (NASDAQ:AMZN). The virus is likely to have a much lighter impact on e-commerce, making BABA stock a great option.
Vanguard Total International Stock ETF (VXUS)
Expense Ratio: 0.09% or $9 on a $10,000 investment
It’s worth noting that choosing stocks that are outside your comfort zone can be a risky strategy. As Lehigh University’s Assistant Professor of Finance Haibei Zhao put it, “Actively trading international stocks can be very costly due to difficulty in information acquisition, currency risk, and tax issues. So for most investors the better way to achieve diversification is to pick some low-fee passive international index funds or exchange-traded funds (ETFs).”
There are plenty of ETFs that offer exposure to different international markets. For those looking to dip a toe into international waters without much hassle, the Vanguard Total International Stock ETF (NASDAQ:VXUS) is a good way to start.
VXUS is a basket of more than 7,000 stocks from around the world. Over 40% of the equities represent Europe. Emerging markets (22.9%) and the Pacific region (28.1%) make up the majority of the fund’s remaining exposure.
Of course, investing in an ETF means you’ll pay fees, but the convenience and exposure that VXUS delivers is well worth the extra expense.
As of this writing, Laura Hoy was long AMZN.