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What percentage of a stock portfolio should be invested abroad?

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Richard Gore
Richard Gore
2 days ago

If your stock portfolio is held in a qualified plan is there a tax cost associated with the foreign withholding tax on dividends for most international stocks?

Carl Book
Carl Book
3 days ago

I may be the odd ball here, but I say stay domestic. I know more about our countries industries and stock market than any other country. If I’m investing for the long term, I believe my returns will be at least as good or better with this approach. I also note that many domestic companies are global so I am getting some international exposure.

Dan Wick
Dan Wick
3 days ago

I have invested internationally for 30 years, but have found that I was constantly tax loss harvesting my international index fund for the last 6-7 years. I have enough capital losses logged thanks to the international funds so I have decided to stick with a 2 fund portfolio of US total market and US total bond. I have been retired for 4 years and feel that the diversity of International is better left to those with decades to reap the benefits. This will be my first full year without an International index fund.

Thomas
Thomas
3 days ago
Reply to  Dan Wick

According to Portfolio Visualizer, an international index fund (VXUS) experienced a CAGR of 5.45% with dividend reinvestment from Jan 2014 to March 2021. Those aren’t whopping returns, but they aren’t abysmal either. At the end of the day, though, what’s most important is that you feel comfortable with your investments.

Although your viewpoint is not popular among readers of this site, at least you have good company: famously, both Warren Buffet and John Bogle dismissed international diversification.

Last edited 3 days ago by Thomas
Nicholas Clements
Nicholas Clements
5 days ago

I agree that my current international allocation of 27% needs to be raised to a minimum of 30%.

Leonard Go
Leonard Go
6 days ago

Maybe not providing the full diversification benefits, but my international exposure is through companies with a global footprint, but US- or UK-based.

Adam Grossman
Adam Grossman
8 days ago

According to an analysis by Vanguard, investors reap the maximum diversification benefit when international stocks account for around 40-50%. You can find the study at https://personal.vanguard.com/pdf/ISGGEB.pdf.

Thomas
Thomas
7 days ago
Reply to  Adam Grossman

True, but a few caveats:

As Figure 3 in that paper suggests, the bulk of the volatility reduction benefit can be reached with as little as a 20% international allocation for US-based investors. And as shown in Figure 4, the correlation between US and international equities has increased over time, reducing the global diversification benefit.

My takeaway is that it’s beneficial to have a fairly sizable international allocation, but the cost of a home bias for US investors probably isn’t huge. That’s assuming there isn’t a black swan event that causes extended US underperformance. Because of that risk, a higher international allocation is probably warranted.

Thomas
Thomas
6 days ago

Ah, good point!

Andrew F.
Andrew F.
8 days ago

I’m at around 34% and have been at that percentage for some time. My foreign exposure is mainly via Vanguard Total International Stock, which isn’t currency-hedged, while their Total International Bond is. The explanation Vanguard gave me is that they want the benefit (and will accept the risks) of currency swings in their international stock offering, but they want more stability in the bond fund in keeping with its role as ballast in a portfolio.

Last edited 8 days ago by Andrew F.
William Ehart
William Ehart
8 days ago

I agree that the Japan example is an important lesson in diversifying away from your home country, especially when there may be a financial bubble. But in my amateur opinion, I’m not so sure that lower valuations compensate for weaker accounting standards and potential government interference in all overseas markets, particularly China. So I’m uncomfortable investing as much there as world market cap would indicate. I have about 37% of my stock portfolio overseas.

Sanjib Saha
Sanjib Saha
8 days ago

I personally think that at least a third of the stock holdings should be in international. My own allocation is 60:40, though I don’t mind going even higher and resemble the Global stock allocation (through a single global fund like VT). I think some overweight to emerging market can be a good bet, especially compared to their valuation to the US counterpart. I have emerging market passive fund (IEMG) and Templeton Dragon CEF to bump my EM allocation.

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