The Prosperity Protocol

Systematic Steps to Investment Success

Issue #3 - April 21, 2025

The Prosperity Protocol

Editor's Note: Welcome to our third issue of The Prosperity Protocol! Your enthusiastic responses to our discussions on investment accessibility and portfolio resilience have been incredibly motivating. This week, we're expanding our horizons—literally—by exploring international investing. As markets become increasingly interconnected, understanding how to effectively incorporate global assets into your portfolio has never been more important for capturing growth opportunities and reducing risk through true diversification.

Have you ever wondered why some investors seem to find growth opportunities regardless of domestic market conditions?

Do you find yourself hesitating to invest internationally due to unfamiliarity with foreign markets or concerns about additional risks?

You're not alone. Many investors limit themselves to domestic markets, missing out on the tremendous opportunities and diversification benefits that international investing can provide. After covering investment accessibility and market resilience in our previous issues, today we're examining how strategic global allocation can potentially enhance your returns while actually reducing your portfolio's overall volatility.

The Global Diversification Advantage

The most overlooked aspect of portfolio construction isn't security selection—it's geographical diversification that can transform your investment outcomes.

I learned this lesson during the 2011-2015 period when international developed markets significantly underperformed U.S. indices. Like many investors, I began questioning my international allocation and considered bringing those assets home. Instead, I maintained my global exposure—a decision that paid off handsomely when international markets outperformed during several subsequent periods. This reinforced a fundamental truth: market leadership rotates, often when you least expect it.

In today's increasingly volatile and unpredictable market environment, this global approach is more valuable than ever. The good news? International investing has become more accessible and cost-effective than at any time in history.

Your Three-Step Global Investing Blueprint

1. Master the International Allocation Framework

Determining your optimal international exposure requires balancing several factors:

For strategic portfolio design:

  • Consider starting with global market weights (approximately 60% U.S./40% international) as a neutral baseline.

  • Adjust based on your investment timeline, with longer horizons supporting higher international allocations.

  • Factor in your existing exposures through employment or business interests that may already tie you to specific economies.

For tactical implementation:

  • Differentiate between developed markets (typically lower risk, moderate growth) and emerging markets (higher risk, higher potential growth).

  • Consider dedicating 10-15% of your equity exposure to emerging markets for enhanced growth potential.

  • Evaluate currency hedging strategies based on your risk tolerance and investment timeline.

One reader recently restructured her portfolio to increase international exposure from 15% to 30%, with a 70/30 split between developed and emerging markets. Six months later, she reported that this more balanced geographical exposure had not only improved her returns but significantly reduced her portfolio's day-to-day volatility.

2. Select the Optimal International Investment Vehicles

The implementation method you choose can dramatically impact your results:

For simplicity-focused investors:

  • Consider broad-based international ETFs that provide instant diversification across multiple countries.

  • Look for funds with reasonable expense ratios under 0.25% for developed markets and under 0.35% for emerging markets.

  • Evaluate whether to use separate developed and emerging market funds or all-in-one international solutions.

For more hands-on investors:

  • Explore country-specific ETFs to adjust exposures based on economic conditions.

  • Consider adding individual ADRs (American Depositary Receipts) of established international companies.

  • Evaluate specialized international sector funds in areas like technology or healthcare.

For advanced investors:

  • Consider international small-cap and value allocations, which historically have offered additional return premiums.

  • Explore international REITs for global real estate exposure with attractive income potential.

  • Evaluate currency-hedged vs. unhedged options based on your view of the U.S. dollar.

My own international strategy employs a core-satellite approach: 70% of my international allocation is in broad-based, low-cost index funds, while 30% is directed toward specific countries and themes with strong growth catalysts and favorable valuations.

3. Navigate International Investing Challenges Successfully

Global investing comes with unique considerations that require specific strategies:

Currency impacts:

  • Understand that currency fluctuations can significantly amplify or reduce your returns.

  • Consider whether to hedge currency exposure based on your investment timeline.

  • Use dollar-cost averaging to mitigate the impact of currency volatility.

Tax considerations:

  • Be aware of foreign tax withholding on dividends (typically 15-30% depending on the country).

  • Investigate tax treaty benefits and foreign tax credit opportunities.

  • Consider placing international investments in tax-advantaged accounts where appropriate.

Information asymmetry:

  • Develop reliable information sources for international market developments.

  • Consider funds with experienced management teams for regions where information may be less transparent.

  • Establish clear criteria for evaluating international investments to avoid emotional decision-making.

The recent currency volatility in certain emerging markets has created both challenges and opportunities. Several subscribers have reported successfully implementing dollar-cost averaging strategies to take advantage of temporary dislocations while minimizing the impact of short-term currency swings.

Market Watch: What to Look For This Week (April 21-25, 2025)

Last week's global markets showed divergence, with European indices outperforming both U.S. and Asian markets. The MSCI EAFE index gained 1.7%, while the S&P 500 added just 0.4%. Emerging markets showed mixed results, with strength in India and Brazil offsetting weakness in China and Turkey.

Key global events to monitor this week:

  • Tuesday, April 22: European Consumer Confidence data will provide insight into spending expectations in the EU.

  • Wednesday, April 23: Bank of Japan monetary policy announcement may impact global currency markets.

  • Thursday, April 24: UK Retail Sales figures will indicate consumer health in Britain's post-Brexit economy.

Last week's earnings revealed stronger-than-expected results from European luxury goods manufacturers, while Asian technology companies provided cautious guidance. This week brings a heavier global earnings calendar with reports from key companies across diverse regions and sectors.

Pay particular attention to forward guidance from multinational companies regarding supply chains, currency impacts, and regional demand trends—these insights often provide valuable clues about emerging opportunities and challenges across global markets.

Term of the Week: MSCI EAFE Index

MSCI EAFE Index – A stock market index that captures large and mid-cap representation across 21 developed market countries around the world, excluding the U.S. and Canada. EAFE stands for Europe, Australasia, and Far East. Widely considered the primary benchmark for international developed market equities, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Many international equity funds and ETFs use this index as their benchmark.

Reader Q&A

Question: "I'm interested in adding international exposure to my portfolio, but I'm concerned about political instability in many countries. How should I approach this risk?" – James T.

Answer: Excellent question, James. Political risk is indeed an important consideration when investing internationally, but there are effective ways to manage it without sacrificing the benefits of global diversification.

The optimal approach involves several layers of risk management:

  1. Diversification across multiple countries is your first and strongest defense. Broad-based international funds spread your investment across dozens of countries, ensuring that challenges in any single nation have limited impact on your overall portfolio.

  2. Adjust your allocation between developed and emerging markets based on your risk tolerance. Developed markets generally (though not always) present lower political risk than emerging economies.

  3. Consider governance factors when evaluating country-specific investments. Many index providers now offer governance-screened international funds that emphasize countries with stronger institutional frameworks.

  4. Maintain appropriate position sizing relative to your overall portfolio. Even if you're bullish on a specific international opportunity, consider limiting single-country exposure to 5% or less of your total portfolio.

Remember that even the U.S. market carries political risks—they're just more familiar. International diversification doesn't eliminate risk but transforms it from country-specific to more diversified global exposure, potentially improving your risk-adjusted returns over time.

This Week's Top Tools & Services

International investing requires the right tools. Here are three that can help strengthen your global investment approach:

1. Morningstar X-Ray – For Global Exposure Analysis
Morningstar's X-Ray tool provides detailed analysis of your portfolio's international exposure, revealing not just your direct international holdings but also the global revenue exposure of your domestic companies. Their premium service (starting at $249/year) offers enhanced international analysis capabilities including country risk assessments and global sector breakdowns.

2. TradingView – For Global Market Monitoring
TradingView provides comprehensive charting and analysis tools for markets worldwide, including those that are often difficult to track through mainstream financial platforms. Their Pro+ plan ($299 annually) includes advanced international scanning tools, extended market hours data, and currency correlation analysis.

3. Interactive Brokers – For Direct International Market Access
For investors ready to access international markets directly, Interactive Brokers offers trading on 150 markets in 33 countries and 26 currencies. Their platform provides competitive currency conversion rates (essential for international investing) and some of the lowest international trading commissions available to retail investors.

All three platforms offer dedicated mobile apps and integration capabilities with major financial software to streamline your international investment process.

Today's Action Steps

  1. Analyze your current international exposure by listing each investment and its geographical allocation. Identify gaps in your global diversification and areas where you might be overconcentrated.

  2. Create a target international allocation model with specific percentages for developed and emerging markets based on your time horizon and risk tolerance.

  3. Research one international ETF or fund that could help fill a gap in your current geographic diversification. Compare expense ratios, performance, and holdings of at least three alternatives before making a selection.

More In-Depth Analysis

Want more comprehensive insights on international investing? Check out my Medium publication "Investor's Handbook" where we explore global investment strategies, country-specific opportunities, and international diversification models in greater detail.

Visit My Medium Publication → Here

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What international investing strategies have worked best for your portfolio? Reply to this email and share your approach—I'd love to feature reader strategies in our next issue.

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Remember – the world of investment opportunities extends far beyond our borders. Those who effectively harness global markets often find growth opportunities regardless of domestic conditions.

Until next week,
Todd Lincoln

This newsletter is for educational purposes only and does not constitute investment advice. Always conduct your own research and consult with qualified professionals before making investment decisions.