If you are new to investing and asset allocation, you might see some recommendations to invest in International Stocks. Still, every person you ask seems to give you a different answer about what percentage of your portfolio should be in international stocks, and why. Personally, I have about 30% to 35% of my portfolio invested internationally (or roughly about 40% of my stocks allocation is non-US).
Here is another view showing 40% of my stocks investments are outside of the US.
How Much International Stock Allocation is Best?
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 invest about half in US stocks and half in non-US stocks, or at least 30% of our portfolio should be in international stocks.
Why 50% International? Labor Capital
The first time I heard the term “Labor Capital” clearly explained was in an article 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 consider their labor capital 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 hundreds (if not thousands) 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 a significant amount of labor capital domestically should leverage foreign investments to spread out the risk.
For example, if your job is affected by a weak 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 a higher 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.
Bottom Line
Most US investors are probably allocated too high of a percentage in US Stocks and should invest more internationally. Based on various viewpoints, I believe the ideal percentage of international investments is at least 30% of your portfolio up to as much as 50% of your stock allocation.
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Pinyo Bhulipongsanon 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®.
After seeing how easy it was for one of my dad’s employers to simply drop 1/4 of their experienced employees…(of course their stock plummeted too) I didn’t want to have all my eggs in one basket. Fortunately, he didn’t.
Well, investing in your companys stock may have some advantages too, for some of us. I just graduated from college and cant afford to invest anywhere else because there is a minimum amount to open an acct, usually 2k, while investing in your compaanys stock you can start with just $7.00, weekly contributions, plus, usually there is a discount (at least for the company i work for), no selling/buying commissions, and a few others??? So its not that bad after all???
Your point about younger investors taking more risks is right on the button. I think that as you get older and closer to retirement you should be looking to consolidate investments into more secure streams, so as to minimise the impact of any negative downturn in stock markets. However there are some people who still like to take risks, i suppose it depends on your personality type.
Pinyo, I like how you clarify that younger investors can take on more risk. Too many people urge younger investors to assume more risk because they think increased stock risk always translates into higher returns given enough time.
These are the same people who also cheerfully point out that past performance is not indicative of future performance. That disclaimer applies to the stock market as well as individual stocks or mutual funds, but you wouldn’t know it from the way they talk.
Investing stocks is a long term activity. My key strategy is to divide investments to several targets to minimize the risk.