When it comes to investing, most of us have heard the general rule of thumb to not put all of our eggs in one basket. But while we know that it’s important to diversify our investments, determining how to create the optimum diversified portfolio isn’t easy to do. In part, that’s because various investment types tend to perform differently by nature, and the timing of which investment is in or out of favor can be difficult to consistently predict.
When it comes to diversification, an important question is how much to invest in the various investment types that are available.
And specifically for our purposes here, how much should you invest in international stocks — especially as you move closer to and then into retirement?
As with most investing-related questions, there isn’t a “one-size-fits-all” answer. What’s right for you depends on a variety of factors, two of the most important being how comfortable you are with risk and your investment time horizon (i.e. how much time you have between now and when you’ll need the money you’re investing).
When it comes to international investments, first understanding their general pros and cons is a good place to start when trying to figure out if they’re right for you.
- By putting money into international stocks, you can take advantage of economic growth occurring abroad.
The diverse nature of the global economy means the economic activity of different nations is influenced by a variety of sectors and industries. For example, some nations are more reliant on manufacturing and exporting, while others see their economic growth driven by commodity prices or the services industry. This means that economic growth rates vary widely by country and by what’s happened during any given year, which has an impact on the nation’s equity markets.
- You’re not bound by the strength (or weakness) of the U.S. dollar.
When a U.S. investment manager buys foreign assets, he or she will receive dividends in the form of local currency (e.g., Swiss francs, British pounds, euros, Canadian dollars, etc.). This can be helpful if the U.S. dollar drops in value and loses purchasing power relative to other currencies.
- International economies can be more volatile than the U.S. economy.
This was illustrated by the unexpected result of the Brexit referendum, which set off an array of financial consequences and questions about the United Kingdom’s separation from the European Union. Such uncertainty tends to shake up currency valuation and markets. Similarly, emerging-market economies (e.g., those of Brazil, Russia, India and China) often have a lot of social and governmental instability, which can also have a negative impact on markets.
- International economies can suffer from a lack of transparency. In other words, some nations can be less than forthcoming about their economies.
For example, it’s no secret that the Chinese government takes an activist role in its economy, and any economic reports it releases may not accurately represent what’s really going on. Because of this, investment managers have to judge the accuracy of data that can have a major impact on the stocks they’re buying and selling.
International stock investments can be an appropriate part of your portfolio, even as you approach and enter retirement, but the overall percentage of your portfolio that they make up can and should vary from person to person. Like any type of financial move, it’s important to do your homework and carefully consider your personal situation before deciding what’s right for you.