If you are new to investing and asset allocation, you might see some recommendations to invest in International Stocks, but every person you asks seem to give you a different answer about what percentage of your portfolio should be in international stocks, and why. Personally, I have been in the 30% range for a long time, but I am making a push toward 35% shortly as you can see in my adjusted portfolio.
Here is another view. The percentage of North America investment is higher here because it is counting US investments in other categories besides “US Stocks”.
How Much International Stock Allocation
Let’s do a quick search…
According to The Balance’s How Much International Exposure Should You Have?
The U.S. accounts for roughly $33 trillion of the world’s $68 trillion total stock market value, or about 49%. So if you wanted to divvy up your portfolio in the same manner as our imaginary pie, you would simply invest 49% of your money in U.S. stocks, and the rest in foreign markets…[but] most financial advisers recommend putting 15% to 25% of your money in foreign stocks, making 20% a good place to start.
According to Capital Idea’s How much international equity do you need?
At Capital Group, we developed 13 objective-based model portfolios covering a range of investment goals… Almost half of the model portfolios have an international allocation of 25% or higher — significantly more than the 14% of overall assets in international funds and ETFs.
On average, U.S. investors hold around 15% of their stock portfolios in foreign companies, but academic research suggests that the correct level might be at least double that…30% may be a good starting point for international stock exposure.
Our expert, Larry Swedroe is even more aggressive with his international stocks recommendation:
I believe investors should consider having 50 percent of their equities in international stocks and have at least 30 percent.
My personal opinion is similar to what Larry suggested, we should be closer to 50% and at a minimum 30%.
Why 50% International? Labor Capital
The first time I heard the term “Labor Capital” clearly explained was in our monthly column by Larry Swedroe.
So what is labor capital? Basically, it’s your ability to generate income by trading your labor for money. Larry advises that investors should take their labor capital into consideration when deciding their asset allocation percentages.
Why You Shouldn’t Invest In Your Company Stock
One of the most common investing pitfalls is investing a significant amount in your own company. You shouldn’t do this is because 100% of your labor capital is already invested in it. If you invest a significant amount in your own company, you risk losing both your job and your investment at the same time — i.e., Enron, Lehman Brothers, etc.
Sure you could cite Microsoft, Google, and eBay as a counter-point to the above argument, but remember that for every Microsoft there are hundred (if not thousand) of companies that failed. However, this shouldn’t stop you from taking a calculated risk if you are in the right place at the right time.
Why You Should Invest Internationally
The same concept applies to domestic versus international asset allocation. People who have significant amount of labor capital domestically should leverage international investment to spread out the risk.
For example, if your job is affected by a poor economy, your globally diversified investment should help soften the blow to your financial well being.
Why Younger Investors Could Take More Risk
Lastly, the concept of labor capital explains why a younger investor could take greater risk with his investment portfolio.
Since his investment is a small portion relative to his income, he could take on more risk and invest in more aggressive investment vehicles. This allows his investment to grow at the maximum potential, and any loss could be offset by adding more money to the investment.
As the investment grows in proportion to the investor’s income level, he should limit the loss by seeking less risky investment vehicles.
Most US investors are probably over allocated in US Stocks and should invest more internationally. Based on various viewpoints, I feel that Larry’s recommendation of 50% is the ideal exposure to international equities.
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.