@Lisa – That’s sound like a lot, but it actual reflects the U.S. to world proportion quite well. That said, I am not sure if I am ready for 70% international

@Mark – That’s what I decided to do at the moment, but it will take a looooooong time to get to the right allocation.

@Crazy – Looks like we are in the same situation.

As far as investing internationally, I believe it’s a non-factor because international companies also trade with or have stakes here in the U.S.

@Adfecto – I like your suggestion of doing gradual rebalance. I may have to schedule it out over 2 years so that I don’t get hit with any penalties.

Yeah, I still have some trouble imagining my money as one big pot and tend to make each work independently — although, it does play a role in my decision making process. I will have to learn to do a better job of looking at my money more holistically.

@James – Thank you. I clarified the first paragraph. U.S. GDP is about 20% of the world and U.S. Market Cap is about 30% of the world. That said, 50-50% is about the limit of my comfort zone.

I do limited market timing with my rebalance, but that’s the extent of it.

@Mike – Good advice. I think I am going to make the change gradually as per Adfecto’s suggestion. In 1-2 years, I should be fully in my new allocation.

I’ve had some similar situations over the last year or two because I’ve learned so much about investing and retirement planning etc. One of the most important things is to come up with an investment plan and stick to it – but what happens if you have a plan and then your situation changes or you learn more about asset allocation and decide to change it?

I think that if you are making changes to your investment plan/asset allocation for the right reasons then it’s ok. The fact that the actions you might take are similar to a market timer is coincidental and should not be a concern. You are still young so the fact that this one time you might be selling low and buying high doesn’t matter in the long run. The idea of passive investing is not to time the markets so don’t do it. How do you know that the US market/dollar won’t go down further?

I think you should set your new allocation and then make it happen – if you want to do it slowly (over a year maximum) then that’s fine or you can just do it all now.

Mike

1) How to rebalance?

My approach would be to do it gradually. First I would set my new contributions to match my target allocation. Next I would select a fixed amount or percentage to re-allocate on your normal rebalancing schedule. Lets say you need to move 30% from domestic into international and you rebalance bi-annually. I would pick say 5% and move it over with each rebalance. After about 5-6 rebalances you will be on target. It is similar to dollar cost averaging except that you are fully invested the whole time so it is unlikely you will loose much performance and may gain a lot. Yes there is an element of market timing to this choice by not moving it all ASAP, but this is still what I would do.

2) Too few funds

It is important to remember that all of your accounts are effectively a single pot of money. If your 401(k) does not offer the slate of international you’d like to own then you can use your Roth to make up for it to some extent. It is also important to pick an international benchmark like the MSCI All World and try to mirror it. The number of funds doesn’t matter; it is how close you get to to your target index that matters most. I only have one international option in my 401(k) that is the MSCI EAFE Index (Europe, Asia, & Far East – aka Developed Markets). I then buy the MSCI Emerging Markets with Roth funds (at least I will once I have the $5,000 Vanguard minimum built up). Then I will own the whole globe in the right amounts to match my index. This is where I should add that you should pay attention to fees as well, hence my emphasis on Vanguard index funds.

1. I feel that 70% is OK for international diversification. Sure, ~50% of market-cap may be domestic, but GDP is more like <20%. (Your first sentence about GDP makes no sense, “I feel like i should be <72% at 50% because US is 50% market-cap, that’s reason to go down from 72%.)

So, world GDP is closer to 70%. And it’d be difficult to argue it’s not going to go up. Sure, it’s like timing the market, but I believe you can make broad predictions — something like “foreign countries will continue to grow faster than the US over the next 10 years”.

2. Speaking of broad predictions, I think it’s silly to try to time the market to the hour or the day or even the week, but once again I don’t see what the problem is with trying to make broad, longer-term predictions. Generally, “get in sooner rather than later — the market will go up in the next 25 years” sounds good to me. And “the market will be volatile for at least the next 3 months” does, too. And, importantly, “the volatility and nervousness with the market has caused stocks to become cheap” … “and bonds to become expensive” are both fair statements.

That’s why I’m holding off on my rebalancing-to-bonds goal that I’ve had for a while. I wouldn’t dare say that next Monday is the best time to buy, but I’d be willing to bet (and I am, I guess) that in the near term stocks will go up relative to bonds.

As for international stocks, I can’t offer as much advice. Sure, they’ve appreciated a lot over the last few years, but I wouldn’t bet that that’s due more to undeserved popularity (there IS some of that) than actual increase in value.

The tricky thing here which complicates matter further is that some of the individual companies that make up the Intl funds invest in US company stocks, and some of the individual companies that make up the US funds invest in overseas company stocks. On top of all this, most, if not all, large cap companies (usually the MNCs) have global operations and hence, have sales both, in the US and international regions.

I agree with Larry Swedroe’s suggestion that we need to diversify between US and International, roughly 50-50. I may go to that extent in the future after watching how my 401(k) portfolio performs over the next 6 months!

80% of your contributions going to domestic stocks.
20% of your contributions going to international stocks.

Try switching them around,

20% of your contributions going to domestic stocks.
80% of your contributions going to international stocks.

This way, you eliminate “chasing performance”, you spread out your “timing on the market” by constant contributions, even if its 20% to domestic (a leaky faucet will fill a bathtub quickly enough), and you diversify your portfolio.

Do some math, see how long it would take you to get to your comfort zone if you took this approach, you might find some surprising numbers.

Just my opinion.
Lisa