How Much Should You Invest Abroad?

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With stocks tanking recently in places like India and Brazil, investors may be cautious about investing abroad. But many experts say that this is no time stay at home. In an era when markets are becoming increasingly global, investors should put at least 30% of their equity portfolios in foreign stocks.

 

The enthusiasm for overseas investing represents a big change from traditional views. Beginning in the 1950s, many academics argued that investors should put only 10% to 20% of their equity assets in foreign stocks. According to the standard view, overseas markets sometimes rose when Wall Street was in decline. So foreign holdings could help to diversify a portfolio, cushioning downturns.

 

But overseas stocks were riskier than their U.S. counterparts, the experts concluded. To avoid disasters, investors should place limited bets abroad.

 

Now researchers have changed their ideas about the risks of foreign investing. At a time when many foreign companies dominate their markets, overseas stocks are not necessarily hazardous. Nokia—the Finnish cell phone giant—is no riskier than Motorola, its U.S. competitor. To take advantage of foreign growth, investors should put 50% of their assets abroad, says Stephen Evanson, a financial advisor in Carmel, Calif.

 

Traditionalists contend that the U.S. has proven a safe haven for years, and investors should keep most assets at home. But Evanson says that the past does not predict the future. In the first half of the 20th century, stocks in Germany and Japan produced meager returns, he says.

 

In the second half of the century, markets in the two countries were among the world leaders. “It is hard to know whether U.S. stocks will outperform foreign equities over the next decade,” says Evanson. “Therefore, it is best to keep half of assets abroad and half at home.”

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