are international stocks necessary: Practical Guide

This article answers the question 'are international stocks necessary' for diversified portfolios. It reviews definitions, theory, evidence (including market cycles and March 2025 market context), ...

2025-12-22 16:00:00

By Meta Cipher

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Are International Stocks Necessary?

A core question many investors ask is: are international stocks necessary for a well‑constructed portfolio? This article directly addresses whether owning stocks domiciled outside your home country (both developed and emerging markets) is essential or simply useful. It focuses on practical, evidence‑based considerations for retail and institutional investors: definitions, theory, empirical evidence (including recent market context as of March 2025), counterarguments, allocation guidance, implementation vehicles, risks, monitoring and rebalancing, and FAQs. Readers will finish with clear, actionable tradeoffs to decide if and how much international exposure fits their goals—and how Bitget tools can help explore global markets.

As of March 2025, according to reporting on comments by Galaxy Digital leadership, digital and tokenized versions of traditional assets are gaining attention alongside broader global market dynamics. This background helps contextualize cross‑border investing trends and the rise of tokenized exposures that may sit alongside traditional international stocks.

Note: This article is educational and not individualized investment advice. Consult a qualified advisor or tax professional for personal recommendations.

Background and key definitions

Before answering "are international stocks necessary", we need shared definitions.

International stocks: equities issued by companies domiciled outside an investor’s home country. For a U.S. investor, these are ex‑US equities. They include companies listed on foreign exchanges and foreign firms with ADRs listed in the investor’s home market.
Developed vs emerging markets: Developed markets (e.g., large OECD economies) typically have deeper capital markets, stronger legal frameworks and higher GDP per capita. Emerging markets refer to economies in growth transition (e.g., many Asian, Latin American and some African countries). Emerging markets generally offer higher growth potential and higher volatility.
ADRs (American Depositary Receipts): Certificates representing shares of foreign companies, traded on U.S. exchanges. ADRs allow U.S. investors to access foreign firms without transacting on foreign exchanges directly.
Ex‑US vs global funds: Ex‑US funds exclude a single country (often the U.S.). Global funds include both domestic and foreign equities—sometimes with a market‑cap weighting that leaves the U.S. as the largest share.
Currency‑hedged vs unhedged exposures: Unhedged international stock investments leave returns exposed to local currency moves versus the investor’s home currency. Hedged funds use derivatives to reduce currency fluctuations’ impact.
Home‑country bias: The documented tendency for investors to overweight domestic equities relative to a world‑market capitalization benchmark.
Market‑cap weighting: A portfolio method that weights holdings by each security’s market capitalization. In global market‑cap weighting, large economies (e.g., the U.S.) naturally get heavier weights.

Understanding these terms helps frame the central question: are international stocks necessary to achieve diversification, reduce risk, and improve long‑term outcomes compared with a home‑country‑only approach?

The theoretical case for owning international stocks

At a theoretical level, several classic portfolio arguments support considering international stocks.

Diversification of returns: Countries’ equity markets do not move perfectly in sync. Imperfect correlations mean adding international stocks can reduce portfolio volatility for a given return target. Modern portfolio theory shows that assets with imperfect correlations can improve the efficient frontier.
Mitigation of concentration risk: Many home markets become concentrated in a handful of mega‑cap sectors or companies (for example, a heavy tech weight). Excluding international stocks can leave an investor overexposed to a single country’s sector cycle.
Sector and factor diversification: Different countries offer sector tilts—some markets have heavier financials or commodity exposure; others are technology leaders. International allocations let investors access factor diversification (value vs growth, small vs large) that may be less available domestically.
Currency diversification: Holding foreign equities provides exposure to foreign currencies. Currency moves can offset or amplify domestic market returns and, over time, can act as an additional diversification source. The theoretical benefit depends on correlation between local markets and exchange rates.
Access to differentiated economic cycles: Local economic growth drivers differ across countries. While globalization has increased linkages, domestic business cycles and policy choices still create opportunities for non‑correlated returns.

The theory is clear: if returns are imperfectly correlated and implementation costs are acceptable, adding international stocks should improve the portfolio tradeoff between risk and return.

The practical case — evidence and recent market context

Theory needs backing from observations. Empirical evidence shows long multi‑year cycles in relative performance across regions and that valuation dispersion exists across markets.

Performance cycles: Historically, U.S. equities outperformed for extended periods (e.g., much of the 2010s into the early 2020s), while international markets have had their own outperformance episodes. These cycles mean the timing of international exposure affects realized outcomes.
The 2025 episode and recent dynamics: Market observers noted an international‑outperformance episode in 2025, driven by sector rotations and relative valuation shifts. As of March 2025, reporting highlighted that tokenization trends and global regulatory developments were reshaping how traditional assets and cross‑border capital flows behave. These structural shifts underline that global exposures can matter beyond pure equity returns—for example, through on‑chain tokenized access to foreign assets or shifting macro liquidity patterns.
Valuation differentials: At various times, non‑U.S. markets trade at discounts (P/E or price‑to‑book) relative to the U.S., which can create long‑term excess return opportunities if valuations mean‑revert.
Research and industry views: Major firms and independent researchers (Vanguard, Morningstar, Schwab, Investopedia and practitioner guides) generally support holding some international exposure. Their guidance varies—some advocate market‑cap global weighting as a default; others suggest tactical or target ranges depending on investor profile.
Diversification remains relevant even as correlations rise: Studies show correlations between major markets increase during crises, reducing diversification benefits at precisely the moments investors most want them. Still, over full market cycles, international stocks have historically improved risk‑adjusted returns for many investors.

In short: evidence supports international exposure as a sensible long‑term allocation for many investors, while acknowledging that timing, valuations and policy developments (including regulatory shifts observed in 2025) influence short‑term outcomes.

Arguments against or limits to the benefit of international stocks

The case for international stocks is not unqualified. Several counterarguments and practical limits deserve attention.

Rising correlations with the U.S.: Globalization, multinational companies, and macro shocks can increase co‑movement across markets. Higher correlations reduce diversification benefits, particularly in crisis periods.
Home‑country bias rationale: Some investors argue that domestic markets already provide exposure to global growth because large domestic multinationals earn substantial foreign revenues. While true to an extent, the legal domicile, balance‑sheet currency, and local market exposures of foreign firms often create different risk/return profiles than domestic multinationals.
Currency volatility: Unhedged international exposure introduces currency risk, which can increase return volatility and produce outcomes that differ from local market returns.
Implementation frictions: Investing abroad may involve higher costs—higher expense ratios for foreign funds, trading costs, tax complications (withholding on dividends), and reporting differences. Small investors may face limited direct access to foreign exchanges, making ETFs or ADRs the common solution.
Limited marginal benefit for some investors: For investors with concentrated human capital or spending tied to a foreign economy, or for those with significant foreign real assets, international public equities may add less diversification.
Potential for underperformance and tracking error: Actively managed international funds and region/country funds can underperform benchmarks, and niche exposures bring tracking risk.

These limits do not negate the potential value of international stocks, but they highlight that benefits are conditional on an investor’s objectives, constraints, and implementation choices.

How much international exposure is appropriate?

There is no universal answer to "are international stocks necessary" in the sense of a single required percentage. Instead, common approaches help investors choose an allocation.

Market‑cap weighted global allocation (default theoretical approach): The broad academic default is to weight by global market capitalization, which typically results in a sizable U.S. share (often above 50% historically for many indices). This approach minimizes active country bets and aligns with the universe’s market exposure.
Typical practitioner ranges: For many U.S. investors, practitioners often cite international allocations in the 20%–40% range of total equity as common. Examples: a 60/40 equity/bond investor might hold 60% equities of which 20%–30% are international. These ranges reflect a balance between diversification and home‑market exposure.
Customization by investor factors: Risk tolerance, time horizon, human capital (future earnings tied to a home economy), currency exposure in liabilities (e.g., pension payments), and tax considerations affect the appropriate share. Younger investors with long horizons and higher risk tolerance may prefer higher international weightings; retirees seeking currency stability and income might favor hedged exposures or lower emerging market weight.
Guidance from major firms: Vanguard often recommends global market‑cap weighting as a default but recognizes client customization. Morningstar and Investopedia provide nuanced guidance that considers investor circumstances and emphasizes diversification benefits without prescribing a single number.

Answering "are international stocks necessary" for a particular investor depends on these choices. For many, some international presence (often 20%–40% of equity) is a practical middle ground.

Factors that should influence the allocation

Several individual considerations should guide the exact allocation:

Residence and tax situation: Tax treaties, dividend withholding rates, and reporting requirements differ by country.
Portfolio size and sophistication: Smaller portfolios may prefer broad international ETFs for simplicity; larger portfolios can use direct country allocations or ADRs.
Existing sector/stock concentration: If domestic markets are concentrated in a sector (e.g., tech), international stocks can reduce sector concentration.
Time horizon: Longer horizons tolerate short‑term volatility and benefit more from diversification and valuation opportunities.
Currency views: If you have a strong conviction about a currency’s movement, you may prefer hedged or unhedged positions accordingly.
Geopolitical and regulatory risk tolerance: Exposure to regions with political or regulatory volatility should match your risk tolerance.
Human capital and liabilities: If your future income or spending is tied to your home country, your effective portfolio risk is already linked to that economy.

Consider these factors when choosing whether international stocks are necessary for your portfolio and at what scale.

Implementation options and practical mechanics

Investors can access international stocks in several ways. Each has tradeoffs around cost, simplicity, and exposure precision.

Broad ex‑US ETFs/funds (total international funds): These provide diversified exposure across developed and emerging markets outside the investor’s home country. Pros: diversification, low cost (for many index funds), simple rebalancing. Cons: exclude domestic exposure and can underweight fast‑growing countries depending on index methodology.
Global funds (including home country): These funds include both domestic and international equities, often market‑cap weighted. Pros: single‑fund simplicity, automatic market‑cap global allocation. Cons: less control if you want a specific foreign tilt.
Country/region ETFs: Target a single country or region (e.g., Europe, Japan, China). Pros: targeted exposure, potential for tactical allocation. Cons: higher volatility, concentration risk, and the need for ongoing monitoring.
ADRs for single companies: ADRs let investors buy shares in specific foreign firms without directly using a foreign broker. Pros: company‑level exposure; cons: single‑name risk and less diversification.
Currency‑hedged products: Use derivatives to reduce currency swings. Pros: reduce forex volatility; cons: hedging costs and potential drag if the foreign currency strengthens.
Tokenized exposures and on‑chain products: As of March 2025, tokenization of traditional assets is advancing. Tokenized stocks or fractionalized foreign equities may provide new access routes for investors comfortable with on‑chain custody. If using tokenized or on‑chain options, prioritize secure platforms and wallets—Bitget Wallet is recommended for Web3 custody features in this context.

Costs and expenses: Expense ratios, bid‑ask spreads, and trading commissions matter. For long‑term investors, low‑cost broad funds typically dominate due to compounding expense effects.

Practical tip: For many individual investors, a simple combination—global market‑cap ETF plus a targeted small allocation to an emerging market or region—balances simplicity and diversification.

Risks and trade‑offs to watch

Adding international stocks introduces specific risks and trade‑offs that investors must monitor:

Currency risk: Currency depreciation in a foreign market can erode local equity gains for domestic investors. Hedging reduces this but at a cost.
Political and regulatory risk: Changes in policy, nationalization risk, or regulatory shifts can impact returns—especially in emerging markets.
Liquidity and tracking error: Smaller markets and niche funds may have wide spreads and tracking inconsistencies relative to benchmarks.
Accounting and reporting differences: Varying accounting standards and disclosure practices can make analysis harder.
Tax issues: Dividend withholding taxes, differences in tax treatment of capital gains, and eligibility for foreign tax credits affect after‑tax returns.
Short‑term underperformance risk: International allocations can underperform domestic markets for extended periods, testing investor conviction.

Monitoring and understanding these risks helps determine whether international stocks are necessary for your portfolio and at what level.

Rebalancing, portfolio construction, and monitoring

Good implementation requires rules for maintaining your target international exposure.

Set a clear target weight: Decide the percentage of equities you want allocated to international markets and document the rationale.
Rebalance periodically: Use calendar rebalancing (quarterly/annual) or threshold rebalancing (e.g., rebalance when a weight drifts ±5%). Both reduce drift and capture rebalancing returns.
Tactical tilts only with a plan: Only deviate from targets if you have a clear, time‑limited rationale and define reversion rules.
Monitor valuation and correlation shifts: If international markets become persistently cheaper or correlations change materially, consider whether long‑term target weights should be adjusted.
Track tax and regulatory developments: As regulation evolves (for example, developments in tokenization or cross‑border trading rules highlighted in 2025), update your implementation plan.
Use low‑cost, broad vehicles where possible: They simplify rebalancing and reduce implementation drag.

Clear rules help answer the question "are international stocks necessary" in a disciplined way rather than reacting to short‑term noise.

Scenario examples / illustrative case studies

Below are simplified, illustrative comparisons to show outcomes when including or excluding international stocks. These examples are hypothetical and meant to clarify tradeoffs.

U.S.‑only 60/40 vs Global 60/40 (20% international equity):
- Period A (U.S. outperformance cycle): U.S.‑only 60/40 outperforms the global portfolio because domestic large caps lead returns.
- Period B (international rotation): The global portfolio outperforms as international equities and currency moves favor ex‑U.S. exposure.
- Takeaway: Over full cycles, the global 60/40 often shows lower drawdown and similar long‑term returns, but it may underperform in strong domestic bull markets.
Concentration risk example:
- Investor A holds a U.S.‑heavy portfolio with large exposure to a single domestic sector.
- Investor B adds international developed and emerging equities (25% of equity allocation).
- When the domestic sector reverts, Investor B shows lower portfolio volatility and smaller drawdowns.
Currency hedge decision:
- An investor adds unhedged international equities and experiences currency drag during a period of U.S. dollar strength.
- Over the next decade, currency cycles reverse and the unhedged allocation produces higher returns than a hedged version.
- Takeaway: Hedging reduces short‑term volatility but may reduce long‑term returns depending on currency trends.

These scenarios illustrate why the question "are international stocks necessary" is situational—benefits depend on timing, market cycles, and investor constraints.

Frequently asked questions (FAQ)

Q: Do U.S. multinationals replace the need for international stocks? A: U.S. multinationals generate foreign revenues, which provides some geographic diversification. However, domicile‑level risks (currency on the company’s books, local capital markets exposure, and distinct corporate governance) mean they do not fully substitute for direct foreign equity ownership.

Q: Is currency risk good or bad? A: Currency risk is neither inherently good nor bad—it's another source of return volatility. Over long horizons, currency moves may offset local equity returns. Decide whether to hedge based on your time horizon, liability currency, and cost of hedging.

Q: How much emerging‑market exposure should I have? A: Many diversified international allocations include emerging markets as a portion (for example, 20%–40% of international equities), but the exact share depends on risk tolerance and the investor’s belief in higher return compensation for volatility.

Q: When might an investor reduce international exposure? A: Possible reasons include tax constraints, a short time horizon, strong currency hedging costs, or when a portfolio already contains significant foreign risk (for example, if you plan to retire abroad and have large foreign real assets).

Q: Are tokenized international stocks a replacement for traditional ETFs? A: Tokenized offerings may increase access and fractional ownership, but they introduce custody, regulatory and operational considerations. Use trusted platforms and custody solutions—Bitget Wallet is a recommended option for Web3 custody in supported jurisdictions.

Summary and practical takeaways

Answering the question "are international stocks necessary" requires nuance:

International stocks are not strictly "necessary" in an absolute, binary sense for every investor. However, for many long‑term investors they are a useful and often recommended component that improves diversification and mitigates concentration risks.
The appropriate level of international exposure depends on personal factors: risk tolerance, time horizon, tax and residency status, existing portfolio concentration, and cost constraints.
Common practical approaches include a global market‑cap weighted allocation as a default, or a split where international equities represent roughly 20%–40% of total equity for many investors—adjusted for individual circumstances.
Implementation choices matter: choose low‑cost broad funds for simplicity, use ADRs or regional ETFs for specific bets, and consider hedging currency exposure when warranted.
Monitor risks: currency, political/regulatory changes, liquidity and tax treatment can materially affect after‑tax returns.

If you want to explore international funds, ETFs or tokenized exposures with secure custody, consider Bitget’s platform and Bitget Wallet to view available global instruments and custody solutions. Explore tools and educational resources to test allocations and monitor portfolio-level currency and country exposures.

Notes on scope and limitations

This article focuses on investment considerations for retail and institutional portfolios, not legal or tax advice. It does not provide individualized investment recommendations. Regulatory and tax rules differ by jurisdiction—consult a qualified financial advisor or tax professional for tailored guidance.

Want to explore global market exposures or tokenized access to foreign assets? Learn about Bitget’s market offerings and Bitget Wallet for secure custody and research tools to model international allocations.

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