How much should we invest internationally? That’s the question that I want to explore with you today. Last week, I posted What’s Wrong with this 401k Asset Allocation? and SJean commented that “25% international is risky” — a sentiment that is shared by a few other commenters. I don’t agree with the comment and want to get your input regarding what percentage of our portfolio should be allocated to international equities.
Photo from NASA
A quick search landed me on The Digerati Life where she offers a chart that shows foreign exposure from 25% as “aggressive”, down to 0% a “very conservation”. In it, she also offers 5 points on the risk and cost involved.
As I continued my search, I also found this cool The U.S. Economic Map Vs. The World at The Global Guru. I don’t have the permission to show the map here, but you should give the article a read. This article gave me an idea to think differently:
What if we think of each country as a company stock?
According to the CIA, the U.S. economy was estimated to be $13 trillion in 2006 (purchasing power parity) and the gross world product (GWP) was $66 trillion. As such the U.S. as a company, represents nearly 17% of the total market capitalization. From this perspective, wouldn’t investing 75% in the U.S. equity market be considered risky when it only represent 17% of the gross world product?
Personally, 28% of my portfolio is invested internationally, and this is risky based on conventional wisdom. But from the perspective I provided, isn’t it a bigger risk to invest 72% of my portfolio solely in the U.S.?