International stocks can add diversity to your portfolio, and can also open up exciting investment opportunities beyond our borders.
In this clip from Industry Focus: Financials, analyst Michael Douglass and Fool.com contributor Matthew Frankel discuss the various types of international stock investments, how much of your portfolio should be in them, and what they mean to your risk tolerance.
A full transcript follows the video.
This video was recorded on May 14, 2018.
Michael Douglass: First off, then, let's talk about international investing and the different ways you can invest.
Matt Frankel: Sure. The most obvious way is to just buy a stock that is a company that's outside of the U.S. But that's not for everybody. We'll get into the reasons in a minute. In addition to that, if you just want to set it on autopilot, you can use an ETF or mutual fund to invest in foreign companies. Like Michael said, the other way is to invest in U.S. stocks, or stocks with substantial operations in the U.S. but that also have a lot of foreign exposure as well.
Douglass: Yeah. One of the key things to think about when considering how to invest your portfolio, the asset allocation piece of this -- like, how much do you put in international stocks -- is also thinking about the different risk types here. A company based in London is very different from a company that's based in, let's say, São Paulo. You have to think about the different types of risk. We'll get more into risk in a little bit.
But, one of the things when thinking about that asset allocation is also considering the different types of risk that you're taking on. Is it political risk? Is it geographic risk? Is it the fact that companies are highly correlated with certain commodity prices? That's a thing you have to think about particularly with international stocks, but really in general about your portfolio.
All of that being said, Matt, how do you tend to think about asset allocation to international companies, or, let's say, international exposure in general in your portfolio?
Frankel: It's hard to tell for sure. I like to keep it between 10-15% of my portfolio, international exposure. Having said that, it's really difficult to get an exact percentage. For example, I own about 30 different stocks. It's really, really tough to figure out the exact percentage of each one's revenue that comes from overseas and to constantly keep that between a 10-15% window. Having said that, that's kind of what I shoot for.
We'll go through a few in a second, but a lot of the stocks that I own in my portfolio have substantial operations overseas. And generally, doing the quick math in my head before this episode, I am within that 10-15% range. That's a pretty good range to shoot for to hedge against currency fluctuations, add a little element of diversification to your portfolio, and things like that.
Douglass: Yeah. And a lot of what I think matters in terms of thinking about this is your own circle of competence. If you have traveled to a lot of countries, perhaps you've done business in other countries, you'll have a better understanding of what the puts and takes are as you're thinking about how to allocate your portfolio there.
As well, just consider your own risk appetite, in general. If you think about it for a minute, let's say, an emerging economy. You'll see this in parts of Southeast Asia, sub-Saharan Africa. Those are going to be very volatile areas, probably. If you are OK with volatility, there may be an opportunity there, depending on what you know and how well you invest. But the flip side of that is, you may also see really enormous swings. That's just something you have to consult your own risk tolerance and your own willingness to accept potential losses before really figuring out where and how and how much to invest internationally.