How Much Should I Invest Internationally?-Part 2
Please check out: International Stock Investing Guidelines-Part 1
In responding to Brian of Luke 1428 Website’s question yesterday, “What percentage of my stock investments, if any, should I allocate towards international stocks and emerging markets (the latter of which seems to have more volatility)?”, you learned the difference between developed and emerging international markets.
Since the U.S. is only one third of the world markets, and in order to participate in world economic growth, it’s important to invest internationally. Another reason to invest internationally is that international markets don’t move in lock step with U.S. markets and that increases the diversification benefit of investing internationally.
Today, in Part 2-How to Invest Internationally Guide, you’ll find out how to invest internationally and get direction in determining how much of your portfolio to allocate to international investments. The last section will show you how to invest in the entire world with one fund.
What Percent of My Portfolio Should be in International Investments?
If you could predict the future, there would be an easy answer to this question. But, since no one knows the future, let’s look at some factors to help figure out the best international allocation for you.
A quick Google search found that “expert” advice is all over the place regarding how to invest internationally and what percent of your assets should be outside your home country. Remember, there’s no ‘right answer” to the international investing asset allocation question.
Take a look at what some personal finance experts suggest in a Wall Street Journal article entitled; “How Much Should You Invest Abroad?”
Gus Sauter, former Vanguard Chief of Investment recommends a home country bias.
He mentioned a common approach to international investing; match the country’s weight in proportion to the size of the market. With this approach the U.S. investor might have 33% invested in U.S. stocks and 65% in the rest of the world. The Australian investor would only have 3% in Australia with 97% in the rest of the world.
Although this sounds reasonable, Sauter points out a fallacy with this approach.
In the next paragraph Sauter debunked this method and recommended a greater weighting in one’s home country. He continued with the Australian example. Sauter discussed the recent success of the Australian economy, which performed better than the world economy over the beginning decade of this century. Had the Australian invested 97% of their stock investments outside Australia, their portfolio wouldn’t have kept pace with the rising costs in Australia.
Frank Holmes, chief executive of U.S. Global Investors Inc. and Larry Zimpleman, chief executive of Principal Financial Group, say, know your risk tolerance.
As shown in Part 1 of International Stock Investing Guidelines, international markets are more volatile than U.S. markets. If you are risk averse and can’t tolerate a higher degree of volatility in your investments, then you want to scale down your international investments.
Zimpleman reminded investors that emerging markets are approximately 45% of the total world markets and are growing faster than the growth rates of developed markets. As an investor, it’s important to understand which international companies are growing the fastest, as they usually provide greater price appreciation. But, investors need to understand the “cost” of faster growth, and that is greater risk or price volatility.
Holmes and Zimpleman remind investors of one of the cardinal rules of investing, know yourself and your risk tolerance when designing your investment portfolio.
Sheryl Garrett, founder of Garrett Planning Network, Inc. says; “Aim for One-Third”.
Garrett goes with the straight up approach of investing one third of investors’ stock assets in world markets.
Let’s look at an example:
Sofia has a $100,000 investment portfolio. She has a typical 60% stock and 40% bond (or fixed) asset allocation.
How much of Sofia’s portfolio would be invested in international stocks?
According to Garrett’s one third of stock assets in international investments, 20% (60% x 33%) of Sofia’s overall investment portfolio would be invested internationally.
Continuing with Sofie’s example, she would invest $40,000 in bonds, $20,000 in international stocks, and $40,000 in U.S. stocks.
For your own portfolio, consider these opinions to help you decide how to allocate the international investments in your portfolio.
International Investing in One Fell Swoop
In Part 1 of this article we looked at 2 international funds, a developed market iShares MSCI EAFE (EFA) fund and Vanguard Emerging Markets Stock Index Fund (VWO) an emerging markets fund.
What if you could get all the international exposure in just one mutual or exchange traded fund? How easy is that?
The longer I invest, the more I strive for investing simplicity. Research is showing that the more complicated multi asset portfolio’s aren’t necessarily superior to the simpler portfolios.
For your international asset class, consider a complete international fund. I am not recommending this fund, but introducing you to one index fund that covers the entire world markets (excluding the U.S.).
Take a look at this Vanguard Total International Stock ETF (VXUS) which invests in developed and emerging markets worldwide.
Why Invest In One International Fund?
With a rock bottom expense ratio of 0.14%, most of your money is going towards the investments, not the managers.
This fund has 17.90% in emerging markets.
VXUS offers broad diversification across the world.
One fund simplifies your investing.
The International Investing Guidelines Summary
“What percentage of my stock investments, if any, should I allocate towards international stocks and emerging markets (the latter of which seems to have more volatility)?” Brian of Luke1428 website.
In response to Brian’s international investing question; there’s no simple answer or exact percent to allocate to international assets. Be mindful of your risk tolerance and recognize that the U.S. is a slower growing market segment than emerging international economies. You diversify your portfolio so that when one asset class goes down, there are others that will go up. The less correlated the asset classes, the better the diversification potential.
Finally, Brian’s question is actually a macroeconomic analysis question. The question to consider is, “How quickly do you think the various international markets will grow in the future?” I don’t know about you, but I’m not an expert in the future growth and development of international economies but I’m smart enough to know that world markets are important for a diversified portfolio.
The exact percentage is your choice. Now that you understand the international investing arena, choose an allocation, and remember, you can always alter the percentages in the future.
Please check out: International Stock Investing Guidelines-Part 1
How are your international investments allocated?
A version of this article was previously published.