I’ve devoted a lot of time recently to thinking about asset allocation. Thus, I was quite interested when the latest issue of “In the Vanguard” arrived and I saw that they had an article called “International Stocks: What’s a Reasonable Amount?”
In it, they argue that investors always seem to chase the flavor of the month and that, lately, that has meant loading up on international stocks. In fact, 85% of the net purchases of mutual funds in the first three quarters of 2007 were global or international funds. But given that today’s leaders are often tomorrow’s laggards, is that a good idea?
According to Vanguard analyst Christopher Philips, 20% of your stock holdings is a reasonable floor for international exposure, with a ceiling of 50%. Currently, non-US stocks account for ca. 50% of the world’s stock market value. Philips argues that having 20% of your stock position in international holdings captures much of the benefit available from international stocks, at least in terms of reduced volatility.
The closer you move toward 50%, the less additional reduction in volatility you will see. Moreover, other risks become more significant as you increase your international exposure, including currency risk, increasing correlations, and higher costs.
Thus, Philips argues that you should limit international holdings to 20-40% of the stock portion of your portfolio with the majority going to well-developed regions such as Europe and the Pacific.
As I detailed the other day, our investment allocation is smack dab in the middle of his range with 30% of our stock holdings being international equities. This works out to 24% of our portfolio as a whole.