What percentage of my portfolio should be international stocks?
In general, Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.
That allocation can be split among developed and emerging markets, depending on an individual investor's goals and risk tolerance. "In general, I recommend clients hold 20% of their assets in international investments," says Jay Zigmont, founder and CEO of Childfree Wealth in Mount Juliet, Tennessee.
However, non-U.S. stocks may be attractive due to lower valuations, higher dividend yields and growth potential in select regions. Investors should consider such investments as an inexpensive way to hedge portfolios against a potential U.S. stock-market pullback.
I've come across a range of suggestions, from 10% to 30%, with some advocating for even higher percentages. For those who opt for a "buy VT and chill" approach, they might find themselves already heavily weighted towards international stocks, with VT representing almost 40% international exposure.
Think long term. 2024 may be a good time to look for bargains in international stocks that have the long-term potential to deliver higher returns than US stocks. Fidelity's Asset Allocation Research Team (AART) forecasts that international stocks will outperform US stocks over the next 20 years.
Before choosing the best foreign stocks, funds or ETFs to invest in, you need to decide how much of your overall equity portfolio to allocate overseas. Since US stocks account for about 60% of all world equity, some advisers recommend stashing 40% of your portfolio in foreign stocks.
In the 1980s, stashing 10% or 20% of a stock portfolio in international markets was considered enough. Today, most experts would consider that too little. Indeed, in the model portfolios offered in the investing chapter, 50% of the stock market money is in foreign stocks.
How much should be invested internationally? In general, Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds.
Diversifying your portfolio into international shares means that you're not putting all your eggs into one local basket. You're reducing your risk, and improving your chance for returns. Different countries experience different economic situations, and their share markets might grow at different rates.
ETFs and mutual funds
One of the easiest ways to invest in a broad swath of international companies across countries and sectors is through an exchange-traded fund (ETF) or a mutual fund.
Is it realistic to have 100% of your portfolio in stocks?
The research by three U.S. finance professors led by University of Arizona professor Scott Cederberg comes to the surprising conclusion that a portfolio holding 100% stocks and no bonds is best, even for people already in retirement.
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
International outperformance in 2023
Should the U.S.'s mega-cap seven stocks lag, a possibility without aggressive Fed rates cuts in 2024 to sustain their momentum, the outperformance by the average international stock since the bear market ended in October 2022 may become more obvious.
Or is a strong dollar good? While a strong dollar may hurt US stocks, it also makes international stocks a bargain for US investors who want to diversify their portfolios.
This has been influenced by the uncertain economic and political environment during the COVID-19 pandemic, where investors have paid a premium for the lower volatility and more stable, predictable returns offered by U.S. equities.
US equities have dominated international equities over the past decade, but in the decade before that, it was international equities that were on a hot streak. The MSCI EAFE Index, which includes companies in emerging and developed markets, outperformed the S&P 500 Index seven times between 2000 and 2009.
The main reasons to invest internationally are to capture higher expected returns and to diversify portfolios across a broader array of asset classes. This can lower the overall volatility of a portfolio and increase the likelihood of benefiting from the return premiums associated with different risk factors.
Key Takeaways
A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad. Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.
There might be other practical considerations that limit the number of stocks. However, our analysis demonstrates that, whether you own ETFs, mutual funds, or a basket of individual stocks, a well-diversified portfolio requires owning more than 20-30 stocks.
What is the best international ETF?
| Fund | Ticker | Return % |
|---|---|---|
| Fidelity Global ex US Index | FSGGX | 7.20 |
| iShares Core MSCI Total International Stock ETF | IXUS | 7.29 |
| Vanguard FTSE All-World ex US ETF | VEU | 7,45 |
| Vanguard Total International Stock ETF | VXUS | 7.39 |
"We screen for S&P 500 stocks that grew sales by at least 10% during each of the previous two years and are expected to grow sales by at least 10% in the current year and each of the next two years," Goldman Sachs' David Kostin said.
Short-term volatility: while the S&P 500 historically provides strong annual returns over the long term, it's not immune to market volatility. Investors must be able to stomach short-term price swings and even sustained periods of market downturn like a bear market.
VXUS's 50-day moving average is 59.25, which suggests VXUS is a Buy.
Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing. See, over the past 50 years, the S&P 500 has delivered an average annual 10% return.
