What Percentage of Your Portfolio Should Be International?

International investing involves assets located outside of one’s home country, such as stocks, bonds, or funds. The primary goal is to broaden a portfolio’s scope beyond domestic markets, accessing a wider universe of investment opportunities.

The Role of International Investments in a Portfolio

International investments offer strategic advantages, primarily by reducing overall portfolio risk through diversification across different economies and market cycles. Markets outside the United States do not always move in tandem with the domestic market, meaning international exposure can help stabilize portfolio volatility and buffer against fluctuations in any single economy.

International investments also provide access to growth opportunities in global economies that may outperform domestic markets. Emerging markets, for instance, offer higher return potential due to rapid economic growth, though they may also carry higher volatility. This exposure allows investors to benefit from economic expansion in other regions, even if the U.S. economy experiences underperformance.

Including foreign assets can lead to improved long-term, risk-adjusted returns. Spreading investments across diverse geographies reduces reliance on a single country’s economy. This strategy broadens the investment universe, bringing in new sources of return and mitigating systematic risks. Currency exposure from international investments also offers diversification benefits and enhances returns.

Key Factors for Determining Allocation

Determining the appropriate international allocation is highly individualized, as no universal answer suits every investor. An investor’s personal risk tolerance plays a significant role, as higher tolerance might allow for greater exposure to more volatile emerging markets. Understanding one’s comfort level with market fluctuations and currency risk is important.

The investment horizon also influences international allocation; longer timeframes better accommodate the cyclical nature of global markets and provide more time to recover from downturns. Historical data shows international stocks can experience significant drawdowns, similar to domestic stocks, but they also tend to generate rewarding returns over time. Investors with a longer outlook can absorb short-term volatility in pursuit of long-term global growth.

Existing portfolio concentration is another factor, especially if an investor is heavily weighted in domestic assets. Diversifying internationally can help rebalance sector exposure, particularly if a domestic portfolio is concentrated in specific industries like technology. Specific financial goals, such as saving for retirement or a down payment, can also dictate the international allocation. A more aggressive growth-oriented goal might justify a higher international allocation, while a shorter-term, capital-preservation goal might suggest a lower percentage.

Finally, an investor’s comfort level and knowledge regarding global markets should be considered. While professional management through funds simplifies access, understanding foreign economies and geopolitical risks influences an individual’s confidence in allocating a larger portion of their portfolio abroad. Tailoring the international allocation to personal circumstances is important for an effective investment strategy.

Common Approaches to International Allocation

Investors and financial professionals consider various frameworks when determining international allocation, often starting with “home bias.” Home bias describes the tendency of investors to disproportionately invest in their domestic market, often due to familiarity or perceived safety. Despite this inclination, a significant portion of global market capitalization resides outside the United States, suggesting a purely domestic portfolio misses a large segment of investment opportunities.

One common approach involves aligning international allocation with global market capitalization, where the proportion of international assets reflects their weight in the total global market. For instance, non-U.S. stocks recently constituted approximately 40% of global market capitalization, which can serve as a benchmark for diversified exposure. While this approach offers broad market representation, it is a general guideline rather than a strict mandate.

Financial experts and academic research often suggest common percentage ranges for international exposure, falling between 20% to 40% of an equity portfolio. Some recommendations suggest even higher allocations, such as 40% to 80% for foreign large-blend funds, though many investors opt for the lower end of such ranges. These percentages serve as general starting points, acknowledging that individual circumstances will lead to adjustments.

When implementing international allocation, investors can choose between passive and active strategies. Passive strategies, such as broad market index funds, aim to replicate the performance of a specific international market index, offering diversified exposure with lower costs. Active strategies involve professional managers making specific investment decisions to outperform an index, which can involve selecting country-specific funds or individual foreign stocks. While active management seeks higher returns, it often comes with higher expense ratios due to increased research and operational costs.

Methods for Gaining International Exposure

Gaining international exposure can be achieved through several practical investment vehicles, with Exchange Traded Funds (ETFs) and Mutual Funds being widely accessible options. These funds pool money from multiple investors to acquire a diversified collection of international assets, simplifying the process. They can be designed to cover broad international markets, focus on developed economies, target emerging markets, or concentrate on specific regions or countries.

ETFs and mutual funds offer significant benefits for diversification, providing exposure to hundreds or even thousands of foreign securities within a single investment. This broad exposure helps mitigate the risk associated with individual stock selection in less familiar markets. These funds are convenient, allowing investors to access global opportunities without opening accounts in foreign countries or navigating complex international trading rules.

Other methods for international investment include purchasing individual foreign stocks or American Depositary Receipts (ADRs). ADRs are certificates that represent shares in foreign companies but trade on U.S. exchanges, providing a simpler way to invest in global businesses without direct foreign market involvement. While individual stocks and ADRs offer direct ownership, they involve higher complexity and greater risk due to less diversification and stock-specific volatility. For most general public investors seeking broad diversification, ETFs and mutual funds are more suitable and cost-effective choices.