Must be a valid email address.
Password must be 8-64 characters.
Must be a valid phone number.
Recession incoming? Here’s how you can prepare.
Daily Capital
Home>Daily Capital>Guides>How Much International Exposure Should You Have?

How Much International Exposure Should You Have?

In recent years, there’s been a lot of noise in the investment world about how increasing globalization has eliminated the diversification benefit to owning foreign stocks. Don’t believe it. Foreign stocks continue to provide diversification and should be part of any efficient portfolio.

But how much is the right amount?

Balancing Domestic & Foreign Stock Exposure

This table provides a look at the annual returns and standard deviations of some S&P 500 and MSCI EAFE blends (EAFE is an industry standard proxy for the stock markets of developed international countries) from 1970 through 2022*.

100% S&P 75/25 50/50 25/75 100% EAFE
Average Annual Return 10.66% 9.89% 9.76% 9.50% 9.10%
Standard Deviation 17.49% 17.36% 18.26% 20.05% 22.51%

 

Although the differences are modest, we see that the 75/25 U.S. to foreign blend had the highest return and the lowest volatility of these choices. Higher return coupled with lower volatility is very rare and very desirable.

For the last decade, foreign stocks have generally outperformed. Thus, some have come to believe foreign, and especially emerging markets, are a better investment. Much the same was said about the U.S. at the end of the 1990s. There is no good reason to think one will do better than the other over very long periods of time. If domestic and foreign stocks continue to have very similar performance, then the benefits of diversification will continue to be modest. But the point of diversification is to protect against the possibility of future poor performance.

Some people point to the higher volatility of foreign stocks as a reason why they should provide higher returns. But the reason for the higher volatility is because of currency fluctuations – not the stocks. As the dollar goes up and down relative to other currencies, it reduces or increases the returns of foreign stocks for U.S. investors. This leads to more volatility.

The bottom line is that for very long periods of time, return expectations for foreign and domestic stocks should be essentially the same. This gives us the following logic to build from:

  1. Foreign and domestic stocks are highly – but not perfectly – correlated.
  2. Their long-term return expectations should be about the same.
  3. Volatility is slightly higher for foreign stocks.

Based on these three observations, modern portfolio theory dictates that rational investors should own a blend of the two, with a heavier weighting toward U.S. stocks.

Our Take

We believe foreign stocks should represent about 30% of total equity exposure for most U.S. investors. This approximately maximizes the diversification benefit without taking too much risk if the U.S. dollar goes on a long run.

Anything in the 20% to 40% range makes sense for most people. As of this writing, about 60% of the value of global stocks is in U.S. companies. This means our recommendation significantly underweights the U.S. relative to the global market.

For similar logic, we believe about a third of international exposure should be emerging markets such as China, India, Russia and Brazil, and about two thirds in more stable developed markets.

Want a better way to manage your investments? Millions of people use Personal Capital’s free and secure online financial tools to see all of their accounts in one place, analyze their investments, and plan for long-term goals, like buying a house or saving for retirement.

Get Started with Personal Capital’s Free Financial Tools

 

*Figures from June 2022.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.

Ask Us Anything
Close

We want to hear from you.

What finance question is burning a hole in your pocket?

Thank you for sharing what’s on your mind!

Our team will be in touch shortly.