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International Investing: What’s Your Asset Allocation?

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The Digerati Life (RSS Feed) just keeps giving me more to write about. This time she presents an excellent article on international investing. In the article she gives great table relating your international asset allocation to a risk tolerance. If you have 25% of your money outside of the US, you are considered an aggressive investor. If you are an investor looking for moderate risk you would put 15% of your money outside of the US.

Recently, I've been thinking that this strategy may be based more on historical performance than what lies ahead. It seems to me that the world is getting more and more globally minded each day. Perhaps it's because transportation is faster and cheaper than it's been in the past. Perhaps it's because the Internet makes international communication instant and essentially free.

If I said that I was going to put 85% of my money Spain, you'd probably think I was crazy. Isn't it odd that Americans (myself included) are willing to put 85% in America? This just doesn't seem like a very good diversification plan. If the economy in America goes downhill, you might possibly lose your job and your investments. If the potential of losing your job and your investments sounds familiar, it's because it happens to those who invest their 401k in their own company's stocks. That's what happened to many Enron employees.

Given my relatively young age, I don't think it's all that crazy to put up to half my money in a variety of companies that are based around the world. It gives me good diversification if any one country experiences hardship. There was a time when it was very expensive to invest money internationally. The fees would could be 1.5% or higher. However, there are some very cheap options now including Vanguard's new Europe Pacific ETF (symbol: VEA). It has an expense ratio of 0.15%, making it a very cheap way to move a lot of money into a lot of developed countries.

What  percent of your money would you put in international invents?  Let me know in the comments.

Posted on August 2, 2007.

This post deals with: ... and focuses on:

Investing

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24 Responses to “International Investing: What’s Your Asset Allocation?”

  1. KMC says:

    I put 40% into an international index fund in my 401(k). No other assets are international (e.g. taxable savings).
    That sounds huge, but a big reason is that I use it kind of as a currency hedge – I think the U.S. dollar is headed down long-term.

  2. I have 25% of my 401k going into international. The last few years it has performed brilliantly.

    http://finance.google.com/finance?q=EFV

    A lot of the S&P have international holdings, and I do agree that with the global economy and infrastructure growing diversification percentage will probably need to grow.

  3. Smith says:

    Currently I keep approximately 45% in foreign stocks – 35% in “mature” markets, and 10% in emerging markets. I feel that diversifying in foreign markets is inherently less risky than trying to invest in individual sectors of the US market. It doesn’t make sense to me that investing in a European stock, like Barclays, or a Japanese stock, like Toyota, would be significantly riskier than a comparative large cap US stock. Investing in foreign stocks (in my view) prevents unwanted excessive exposure to sectors or stocks, increases (rather than narrows) what you can invest in, and decreases reliance on the US economy.

  4. I still have most of my money in the U.S. because it feels familiar and comfortable; it’s also a lot smoother ride than being invested in foreign stocks. I recall how painful it could get when my foreign funds would crater as they did several times in the last 15 years. I didn’t see those same lurches with domestic funds. But if you have the stomach for the occasional volatility you’d encounter with the international sector, you may find yourself handsomely rewarded down the road.

    I’m adding to my foreign position these next few weeks, while the markets are hiccuping… :) Hoping to reach 20% – 25% allocation.

  5. Alex says:

    Excellent post LMM, I’m definitely nervous about the U.S. economy tanking, though that said, I don’t know enough about foreign countries and its odd to put so much of my money into something I only vaguely understand. I have about 30% of my 401K in international investments.

  6. daHIFI says:

    I currently have 50% of my 401K in an international fund. I reallocated 3 months ago and have had an 8% gain so far this year.

    About 10 months ago I started researching Indian and Chinese ADRs to invest in. I used the lists from ADR.com and plugged my top picks into a watchlist on my brokers site with a hypothetical $250 investment in each stock. While monitoring the watchlist and importing Google news feeds into my RSS reader I purchased a half dozen of these.

    In India I invested in two of the top banks because of the record amount of loans being handed out over there. I also picked an information technology services company.

    In China, I picked a car company that will be making big moves in importing automobiles to the rest of the world in the next few years. My next was one of the top cellphone providers. And to cash in on the upcoming summer Olympic games, I bought one of the top airlines, and after that an Orbitz-type flight and hotel booking site. My last pick was the top China based search engine, which I bought after it has doubled in price in the past 4 months. Only 20% of Chinese are online now, so I expect the market for that to increase dramatically in the next few years.

    As you can see I’m really bullish on China, and everything I pick for stocks I pick with the long term (1-5 years) in mind. Foreign stocks make up about half of my portfolio right now.

    And to touch on what KMC said, I also agree that the dollar will continue it’s downward decline against the Euro and the Pound. My next step is to convert my savings account over to a foreign currency. I use HSBC right now, and while they have offshore based accounts, it seems that the minimum balance to open is around $20,000, way more that I currently have.

    Lazy man, maybe you or some of your readers could make some suggestions on how someone just getting started on the high net worth train can take advantage of how to capitalize on the the falling dollar.

  7. Lazy Man says:

    daHIFI, I agree with you and KMC that the dollar may very continue to decline against some foreign currencies. There are several ways one could position oneself to take advantage if they believe the same. There is the obvious one, currency trading – but that’s an advanced, risky investment area. There are far smarter people than I in this area.

    You could put your money in currencies and banks overseas as you mention, but the minimums are high ($20K as you mentioned), and I haven’t done the research to know if it’s got the equivalent of FDIC insurance.

    This is why I suggest the simplest thing, investing in foreign mutual funds or ETFs. People already know how to do this, it’s just putting a different ticker symbol into their online broker, shifting some money in your 401k, etc. That’s the quickest and easy way, in my opinion.

  8. Moneymonk says:

    20% thinking about bumping it up!

  9. J2R says:

    I have some South America ADR as well as Vanguard Index Funds and the infamous DODFX
    I think I’m overly aggressive with over 50% of my portfolio in international stocks.

    Another interest thing I was researching was to invest in International FIXED investments. In my home country, they’re giving 10% FIXED rates.
    This rate, plus the continually loss in dollar value, would give me a return of maybe 12% fixed.

    Of course, if the dollar turns around (which I don’t think will happen anytime soon), then my 10% would become more like 6-8%. Which is still a good return.

    I’m still researching how to do this. Countries don’t like when you invest money to spend it elsewhere. They would like you to spend it where you invested it.

  10. mapgirl says:

    Right now it’s 21.08% international, but I reallocated my 401k plan so that number is climbing. My target is to get to about 35%. It’s mostly in large caps overseas so I decided to add a value fund to it. I wish the funds available were classed emerging and non-emerging since I would like more country exposure in Asia and Latin America. Right now, I think the blended fund is dominated by Europe with a little in Japan. I’d take on slightly more risk internationally since I think that’s inherent with emerging markets. But no dice on the plan offerings.

  11. I am 40% Large Cap American stocks.
    20% international
    15% small cap
    15% bonds (Large, internaltional, and junk)
    8% Oracle and Penny stock
    2% Prosper p2p Loans

  12. The Div Guy says:

    I have about 40% invested internationally. Most in Vanguard Index funds and an international REIT. I was about 50% at the beginning of the year but I have reduced my emerging market exposure. I have been meaning to post on my asset allocation but I have spent too much time playing with my kids!

  13. rstlne says:

    The last time I did a pie chart, my assets were allocated at around 30% international stocks, 30% domestic stocks, and the rest in cash, bonds, and precious metals. However, I really don’t make a distinction between international and domestic. Sector allocation is more important to me than geography.

  14. Brip Blap says:

    I’m usually somewhere between 30 and 40 percent in foreign index funds, usually various Vanguard funds (VPACX, etc.). I do it since I take somewhat of a contrarian view of the long-term prospects for the US economy. But you have to do it in this day and age because the entire US market is becoming so interdependent. Just because you’re diversified across US sectors wouldn’t protect you if (and this is my big fear) there was another significant terrorist attack in a major city. I think big money would flee like crazy to the overseas exchanges in that event. So not that I intend to profit off of that, but I want to be prepared for terrible events I sadly imagine are possible, or even likely.

  15. Shadox says:

    I am 24.8% international. Div Guy – which international REIT are you invested in?

    Currency risk is a real issue with international investments, as other commenters have point out. There is something to be said for having the bulk of your assets in the same currency as your financial obligations.

    I would also like to say that although I am I a big proponent of international diversification, the diversification benefits of international investments have been diminishing in recent decades. International stock markets have become much more tightly correlated these days. When one sizeable market sneases the global equity markets tend to catch a cold. Having said this, considerable diversification benefit is still there.

  16. NCN says:

    My wife and I have 4 “retirement accounts”…
    She has a pension plan.. so no need to worry about allocation there.. they take 5% and she gets a guaranteed ‘salary’ in retirement..

    So, that leaves her Roth, my Roth, and my 403b…
    So, I have Index ETFs inside my Roth and her Roth… S&P 500 for her, Vanguard Total market for me..

    That leaves my 403b… and here’s where I get a little aggressive…
    I have 40% international, 30% small cap, and 30% Reit…

    So, I’m conservative w/ the Roths and aggressive w/ the 403b…
    NCN

  17. MossySF says:

    My current portfolio — about 30% developed international and 10% emerging markets.

    Pondering a new strategy where I will ramp up the risk on the stock side and compensate for that with more treasuries/tips/commodities. Thinking about a target of 30% emerging market, 35% developed international, 35% domestic. Over time, developed international slice will go down because I can’t contribute enough to my Roth IRA for my international ETFs to keep up. I suspect after a few years, it’ll look like 30% emerging market, 20% developed international, 50% domestic.

  18. Like Digerati Life,
    I have most of my money into the same market (Canadian by default!). I will look definitely forward to invest in the US market but other than that, I am not comfortable enough. I feel that if I invest in foreign markets, it would be to by index I don’t even know what they represent. I can you really know all stocks across the world when you have a hard time following the North America’s Economy?

  19. MoneyNing says:

    I also have about 20-25% in my taxable account and 20% of my 401k is in foreign stocks. The mutual fund I buy is DODFX which has been great for me. However, it’s mostly based on European stocks though so it’s not for those that are looking for high growth high risk.

  20. ryan says:

    i have 40% in the Total international fund at vangaurd. i am slightly heavier on domestic. 40% S&P Index, 10% small value index, 5% REIT index, and 5% Altria.

  21. HButler says:

    I agree. I know that I don’t know what will happen, so like Vanguard, I try to invest in proportion to capital and risk. The USA had ~75% of world captial in 1945; now it is somewhat less, perhaps 25%, although it is hard to be sure about this. Because of this uncertainty, I have 50% of stocks in the USA and 50% overseas, mostly via ETF’s.
    By the way, the Vanguard International Index Fund is a fund of 3 funds, and shifts its allocation yearly according to the market. Vanguard is introducing a Global Fund before 22 June 2008; it will have 45% in the USA.

  22. […] Lazy Man’s allocation is 50%. […]

  23. Michael Jash says:

    “Thanks to http://www.AskaMarketTechnician.com , we hedged with the right options before (italics) the market tanked…”

  24. […] The Sun (not the one in the sky, but another great Sun) writes about weathering the stormy market with a rebalanced portfolio. Reading the article left me winded. There's an avalanche of good ideas there. I'll stop the weather analogies, however, with the US markets and dollar being questioned this might be a time to re-assess your international asset allocation. […]

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