How much should I allocate to international mutual funds and stocks?
A good company is a good company, whatever country its headquarters happen to be; but in the United States tend to think more locally when it comes to our investments.
Investment Company Institute data for 2012 shows US equity funds make up nearly 3x the dollar amount held by US investors over international funds.
With the world market capitalization of US firms currently making up roughly 45% of global market capitalization and historically fluctuating over the last 30 years from a high of over 60% in the late ‘60’s and early 70’s to a low of 29% in the late ‘80’s (MSCI World index data), the data shows US investors have a significant bias towards owning US equity mutual funds.
Being underweight in global firms has not traditionally been a concern for US investors, but in a global economy, having a portfolio tilted heavily towards advanced economies means on a global level investors are underweight in companies in areas such as basic materials, and overweight technology and healthcare. These companies can provided diversification, and while over the long-run we have seen correlations for global stocks move more in step, in the short-run being more diversified can help nervous investors stay the course.
How much you have invested internationally?
Some suggest the starting point is a target weighting based on the world market capitalization, and then consider adding a level of home country bias.Investing internationally adds both rewards and risks, some of which being currency risk and investment cost (including individual investor costs and higher costs for mutual funds).
In a March 2012 research report, Vanguard reviewed historical results and found for investors who have equity targets of at least 60% of the total portfolio, that an allocation of the stock portion of your portfolio of between 30-40% international stocks provided the most benefit as far as reducing volatility.
The key for individual investors is to set a target, monitor your allocation, and rebalance regularly. Don’t be swayed to too frequently or significantly change your target based on reaction to current media opinion.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/