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How Much International Stock Do I Need?
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This isn't an easy question to answer. Every investor is different and how much they
should allocate to international stocks is a function of a lot of different factors, such
as age, risk level, and time horizon to retirement. Most investors, however, can
benefit from having some international stock exposure. Albeit risky, international
stocks offer some significant diversification benefits by providing exposure to
different market conditions and currencies.
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They also tend to have slightly lower correlations (more on that later) to the U.S.
stock market and can help drive returns (over the long term, investing in a mix
of U.S. and foreign stocks could produce higher returns than investing in U.S. stocks
alone).
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| Get Diversified |
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Diversification is one of the keys to long-term investing. A well-diversified portfolio can help
dampen the effects of a market downturn and protect your portfolio from market gyrations (often
referred to as market volatility). And by diversification, we mean spreading out your retirement
savings among different types of investments (such as small-cap stocks, growth stocks, bonds,
etc.) that aren't highly correlated. Correlation is a statistical measure the shows the relationship
between investments. Results can vary from +1.0 to -1.0. From a performance perspective,
investments with a correlation of +1.0 move in the same direction simultaneously; investments
with a correlation of -1.0 will move in the opposite direction.
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In recent years, the correlation between international stocks and U.S. stocks has been quite high.
That said, by combining US and international stocks, you still should be able to slightly cushion the
blow when US markets take a nose dive or the US economy begins to sputter. There's no
guarantee that this will happen, as the two have become more highly correlated in recent years
and their correlations could continue to change.
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| How Much Do you Need? |
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In general, younger investors can benefit by shifting a portion of their overall equity allocation into
international stocks (most financial advisors recommend that no more than 30% of a younger
investors' equity allocation should be in international). The reason younger investors benefit from
international stocks is because most of their retirement portfolio is typically concentrated in
equities (in some cases more than 90%). As such, they are not as well-diversified as older or more
conservative investors, who typically will have 40% or more of their portfolio allocated to bonds,
which can be a relatively reliable diversifier in volatile markets.
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Additionally, younger or more aggressive investors can typically assume the added risk that
international stocks carry, especially emerging market stocks. Conservative investors often can't
afford to take on too much risk and as such probably don't need more than 20% of their overall
equity allocation in international stocks. And since they generally have at least 40% of their
portfolio in bonds, their portfolios are already diversified so they may not benefit as much from
the diversification that international equities can offer.
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| Next Steps |
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If you are enrolled in our Managed Accounts service, then you don't have to worry about this as
your portfolio has already been optimized for you based on your age, risk capacity, and financial
situation. If you aren't in the Managed Accounts service, then we recommend you talk to a
financial advisor first before adding international equities to your portfolio as finding the most
appropriate stock mix for your retirement portfolio is not for the faint of heart.
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Securities of issuers domiciled outside the United States, or with significant operations outside the United States, may lose value because of political, social or economic developments in the countries or regions in which the issuer operates. These securities may also lose value due to changes in foreign currency exchange rates against the U.S. dollar and/or currencies of other countries. Securities markets in certain countries may be more volatile and/or less liquid than those in the United States. Investing in countries with developing economies and/or markets may involve risks in addition to and greater than those generally associated with investing in developed countries.
Diversification does not ensure a profit or protect against a loss in a declining market.
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