What percentage of 401K funds should be allocated to International stocks?

Question

While nobody can predict the future, I can not think of a reason that these markets, both develped and developing will not continue to do well. What are people with financial/economic backgrounds predicting will happen with these markets?

Answer 1

Although not perfectly correlated, U.S. stocks and stocks of developed foreign countries provided similar annualized returns the last 50 years. There is every reason to believe this will continue in the future … although you should always view future predictions with some skepticism. Regardless, there are a few issues you should be aware of.

Developed foreign stocks are bit riskier than U.S. stocks because of the currency exchange that occurs when buying or selling. If the dollar strengthens verses the Euro or the Yen, it will decrease your returns. However, a fall in the dollar actually increases foreign stock returns. This effect neutralizes itself over long periods of time, since there is a reversion-to-the-mean present in currency exchange rates. Still, this extra factor causes foreign stock returns to be a bit more volatile.

Foreign stock funds tend to have higher costs compared to domestic stock funds. First, foreign governments impose taxes on your investment gains, even if you hold your fund in a tax-sheltered retirement account. You do not need to fill out any paper work or send money, since your fund manager will automatically pay the foreign taxes. However, it does deduct a small cut from your profits. Second, managers tend to charge higher expense ratios for funds investing in foreign stocks. Third, bid-ask spreads tend to be higher with foreign stocks than with domestic stocks, raising the "hidden" transaction costs.

Currency exchanges and higher costs are good reasons to limit your foreign exposure. Overall, there is no incentive to overweigh your portfolio in developed foreign stocks, since the U.S. market should give comparable long-term returns. However, because foreign stocks will not likely share a perfect correlation with U.S. stocks, there is a diversification benefit. Therefore, we should hold at least some foreign stocks.

So, how much of each asset class should you own? Well, you cannot know what specific mix will be the best for the future. The best portfolio of the last decade is rarely the best portfolio for the upcoming decade. However, as long as there is a reasonable chance that certain asset classes will be non-correlated, you will benefit from owning at least some of each. In doing so, you will reduce volatility, increase return, or both. So even if you do not get the extra return, at least you reduce risk.

In fact, it seems that the specific percentages you pick are not as important as simply picking a plan and sticking with it. No single opinion is superior to another, since no one can predict the future. A good asset allocation is one that is straight-forward, consistent with market capitalization, and not too far extreme in one direction or the other. It would behoove you to look at many different opinions and then develop a hybrid answer for your own plan.

But this may a moot point. One, studies show that the majority of risk in a portfolio is determined by the stock to bond ratio. The forign to domestic stock ratio plays only a minor role. Second, studies show that almost all of a portfolio's gross return depends on the asset allocation, most of that determined by the stock to bond ratio.

Several landmark studies, summarized in these links, show this:

- http://www.nomonkeybusiness.org/articles/the90rule_or40_or100.pdf
- http://www.ifa.com/media/images/investmentpolicy.pdf
- http://www.fpanet.org/journal/articles/2006_Issues/jfp1006-art6.cfm

Answer 2

I would say - at least - 25%. You should be diversified - some large stock funds, some overseas funds, some index fund, and a bond fund. I think the European markets and Asia offer great value. The EU is 400 million people. India and China have over a billion inhabitants each. They both have rapidly growing middle classes.
The USA is a debtor nation - our trade deficit is enormous - all the dollars are going overseas. The Federal deficit is huge.
What has helped is having China and the Middle East countries investing those trade dollars in US Treasuries. How long will this last?
Europe, Japan, China and India are gowing faster than the US at the moment.
In short, don't have all your 401K assets in dollars - an international fund gives you some protection against a devalued US dollar.

Answer 3

You should probably allocate 15% to 25% to foreign stocks if you're relatively young. Over 50, you should start paring it back a bit because you're getting close to retirement.

Most 401K plans have one or two international funds, and they will presumably be diversified across many different countries. It's very difficult to buy foreign stocks that aren't listed in the United States (involves a lot of fees at least).

Diversification is what you want in your portfolio. You don't want to be concentrated too much in an industry, and it's good to get some international diversification as well. Diversification lowers your risk, but doesn't necessarily lower your expected return. Just make sure tha tthe fund is decently diversified: Europe, Asia and Latin America represented. Make sure that it's not too oriented towards developing countries, because these have higher risk and potential for big drops (and big gains of course).

As far as what experts think, there are many opinions out there, and there are of course many different markets. It's not just the US and non-US. Ireland is different from Japan, and they're both different than Brazil.

Answer 4

The first question I would ask is: How old are you? A more accurate question would be: How must time do you have to make up possible losses? Financial advisers and columnists advise a percentage of your invested money be in international stocks based on theory. The theory holds that international stocks carry some additional risks (changes in government policy, in government, in currency, in trade rules, the possibilities are endless) but offer exposure outside of our markets. If the market (our market) receives bad economic data, it generally goes in the red as a whole; carrying most individual stocks with it. International stocks are intended to offer exposure outside of our markets to combat that and similar reasons. If our market were to go in the red (down) for any reason and for any length of time, a portion of your money (money invested internationally, in bonds, and in cash) will not be affected. As an individual, I am not invested in foreign stocks because of some disadvantages I carry. I can not regularly monitor their markets to understand their government policy, economy, etc. Most foreign companies do not have information readily available as US companies do. Information available is not readily translatable (Ex. even though we share very similar language, european companies have different tax rules, different disclosure requirements, etc.) The information is key.

Answer 5

The only problem is the volitivity of the governments there which is why it is high risk, but the returns are in the 20% range, myself would only gamble 20-25% pick up some great growth but watch the overall situations

Answer 6

Nobody should even try to answer that question unless they find out more information about you first. For starters, what is your risk tolerance, how close are you to retirement, and what does the rest of your portfolio, 401(k) and otherwise look like? There is no single answer for all investors.

Answer 7

having money in any stock is dangerous. go with low risk ones that maybe over seas. if it seems to do better than the one us ones. go for it. just lookat which investments are from whichcountry who encomny is doing better than ours. the go with them. but any stock investment is risky no matter what.