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On average, how much of my stock portfolio should be in international stocks?

Apr 25, 2012 by Ian from Emporia, KS  |  Flag
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20 votes

You're likely to get several different perspectives on this, Ian, but I believe that international stocks provide diversification benefits versus domestic stocks to a point, but they also introduce currency risk. And a stock's return has no dependence on whether the company is headquartered in the US or abroad. As a result, I recommend approximately 15% of your total stock portfolio be allocated to diversified international stocks.

For more on this topic and the reasoning behind my approach, I'd encourage you to read this article: http://www.financeware.com/home_page.aspx?showsnippet=04.11.12.wem

Comment   |  Flag   |  Apr 25, 2012 from Atlanta, GA

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19 votes

Russ is right that you will get different perspectives on the percentage allocation of international stocks in your portfolio. That's becasue a portfolio allocation has to be very personalized. For some, 30 to 40% may be appropriate, but for others as little as 5 to 10% may be right. You also need to separate developed country exposure from emerging markets in your international allocation decision. And remember, many of the US stocks you may already own provide you with the international exposure you need. Companies like CocaCola, McDonalds, and General Electric for example have a significant portion of their earnings generated from outside the US.

2 Comments   |  Flag   |  Apr 25, 2012 from Point Pleasant Beach, NJ
Ryan

You mention separating developed country exposure from emerging market exposure, which is a key distinction. How do you think about making sure you have exposure to international stocks of all capitalizations as well (Large/Mid/Small/Micro)? I don't here much discussion about small cap international exposure, but I know some advisors feel that it is valuable.

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Flag |  Apr 25, 2012 near San Diego, CA
Jeffrey Allen Bogart

Good point Ryan, International Value (small, mid and large caps) is much less correlated to the U.S. market and has had better returns. (ie. French/Fama three factor model). But since there is no free lunch in the the investment world extra reurn comes with extar risk!

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Flag |  Apr 26, 2012 near Cleveland, OH

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16 votes

Hi Ian, at the end of 2011, the total value of all stocks on all the various world markets was around $47 trillion. The US stock market represents about $16 billion of that total, or about 1/3rd of world stock. So one could argue that a truly globally diversified stock portfolio should be 67% international and 33% US...

But in practical terms, how much or little you allocate to international stocks is a function of your investment goals, your time horizon to invest, how the other pieces of your total portfolio (stocks, bonds, cash, etc.) will interact with international stocks, etc.

Russ hit the nail on the head: you'll get several different perspectives on this one. To narrow down your question, a range between 10% up to 50% of your total stock allocation may be appropriate, depending on your situation and unique circumstances.

Mike

Comment   |  Flag   |  Apr 25, 2012 from Orland, IN

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8 votes

All the comments I've read on this question are both thoughtful and well-informed, so it's hard to add to them; however, age and risk tolerance are only two considerations. Your liquidity needs within the next five years vs. the size of your investment portfolio is another consideration. If it turns out an allocation to this sector is warrented in light of all those considerations, I would suggest using index funds or ETFs, rather than trying to pick winning mutual funds or managers. Few individual investors - or pros for that matter - outperform their indexes, and you would be doing well to simply get as close to matching that sector, rather than having to beat it by the expense premium.

Comment   |  Flag   |  Apr 25, 2012 from Moorpark, CA

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8 votes

Ryan, I agree with Barry for the most part. However, given the extreme volitility in today's markets, you may want to consider some type of tactical strategy that will overweight and underweight this asset class given changing global conditions while maintaining your risk profile. Good Luck, Dan Chen

Comment   |  Flag   |  Apr 25, 2012 from Asbury Park, NJ

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7 votes

Depending on your age and risk tolerance, I would recommend 15-25%, divided among developed and emerging mkts.

Comment   |  Flag   |  Apr 25, 2012 from Fort Lauderdale, FL

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4 votes

I would say about 20%.

Comment   |  Flag   |  Apr 25, 2012 from Port Washington, NY

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3 votes

The concept of having a correct allocation to International is not the way we look at the world. And we consider ourselves global investors!

As indicated above, something like two-thirds of the stock market opportunities in the world are outside the US. And those opportunities, as is the case here at home, run the gamut from speculative stocks with little investment merit to businesses of enduring value.

If you omit countries we avoid due to their lack of transparency, history of property rights abuse, and the fact they don’t have anything particularly special to offer investors, the universe of foreign stocks is probably 40-50% of all opportunities.

“Correct allocation” is not in our mind-set because the world has become so interconnected. Go to a drug store and check out the personal care section. Domestic and foreign companies are competing head-to-head and have one thing in common: their respective foreign sales—whether they’re American, French, German, or British—account for more than half of their total revenues.

So most multinationals, no matter where they’re located, should be considered International Investments. We are global thematic investors and seek to find businesses of enduring value at reasonable prices. We invest in these multi-nationals when they’re at attractive prices regardless of country location.

Equally, we seek to mitigate risks associated with certain policies our government has implemented to ward off deflation. And in our search for “stores-of-value,” we consider foreign companies that both meet our investment criteria and offer opportunity given the times we live in.

We believe these foreign companies must not only have a competitive edge, but the country where they do most of their business must have an edge as well.

In other words, we are bottom up investors. Right now, due to our analysis of individual securities, about 63% of our portfolio is comprised of companies located outside the US. This is no magic number and it could be significantly different in the future.

Comment   |  Flag   |  May 03, 2012 from Bryn Mawr, PA

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2 votes

There is no magic number, but don't over-diversify just for the sake of diversification. Invest in things that you understand and pay attention to price. The market is dynamic and there are times when it will be favorable to invest abroad and times when it wont be (even if you're a long term investor). If you're not a professional investor spending all your time looking for opportunities in shifting capital markets, then you might be better off considering staying more heavily invested in core areas of expertise (for instance your industry or your community). Unfortunately proper investing isn't about taking a set it and forget it approach. Understanding the investment environment takes a lot of time and energy. There aren't shortcuts.

Comment   |  Flag   |  May 13, 2013 from Santa Monica, CA

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