Before choosing the best foreign stocks, funds or ETFs to invest in, you need to decide how much of your overall equity portfolio to allocate overseas. Since US stocks account for about 60% of all world equity, some advisers recommend stashing 40% of your portfolio in foreign stocks. But that may feel like too much, especially since foreign investing can come with greater volatility as well as geopolitical, economic and regulatory uncertainties.
Jeff DeMaso, CFA, editor of the Independent Vanguard Adviser newsletter, suggests taking these steps to make the best decision for your circumstances…
Start by allocating 15% to 20% of your equity portfolio to foreign stocks. That’s the percentage I typically maintain in the Vanguard portfolios. It’s meaningful enough to make a difference in your overall returns, but not so much that it will ruin your portfolio when foreign markets temporarily fall out of favor.
Adjust your allocation up or down depending on your personal factors. Examples: Investors who have very tech-heavy portfolios may want to ratchet up their exposure to foreign stocks, which tend to be more value-oriented. If you are a retiree drawing down from your portfolio to spend in US dollars, you may want to decrease your foreign exposure to avoid the risk of currency fluctuations.
Take on emerging-market stock exposure only if you have a long time horizon (10 years or more)—and the discipline to stay invested through the ups and downs. Even then, keep your exposure to 5% or less of your overall stock portfolio. Reasons: Emerging markets have been about 10% to 15% more volatile than the S&P 500 over the past decade. That makes investors particularly likely to jump in and out of this asset class and end up losing money to poor market timing.
