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Diversify With Global Investing

I remember the first time I advised a client to invest a portion of his stock portfolio in international stocks. He said, “I can’t do that, it’s just un-American.”

That was 25 years ago. How times have changed.

The reason I’ve never recommended owning just U. S. stocks in a portfolio is the same reason I wouldn’t recommend owning just one company’s stock. It makes as much sense to diversify among countries as among companies.

The question then becomes how much of a person’s stock portfolio should be in international stocks. For many years the standard thinking of portfolio managers was, “Not much.” It was, and to some degree still is, common to see 80% of a portfolio’s equity allocation in US stocks. When you consider that the U. S. accounts for far less than 80% of the global market capitalization, that’s never made a lot of sense to me.

In the 1980’s, U. S. companies accounted for about 65% of the global capitalization. Accordingly, I weighted my stock portfolios with 65% U. S. and 35% international. By 1999, the U. S. had slipped to 50%. I adjusted my portfolios accordingly.

The latest statistics from 2009 show the U. S. has continued its downward slide, now accounting for just 35% of the global capitalization. Investors who want to maintain a true global diversification of their stock portfolios will need to seriously consider reducing their U. S. allocation.

Which international stocks, then, should be added? The growth in Asia is astounding. Ten years ago Asia accounted for 20% of global equity capitalization. Today, it’s 35%. China and Hong Kong, Asia’s major economic engine, make up 13% of the capitalization. Japan, even with its 20-year bear market, has the second largest country capitalization of 7%. Everyone else, including India and the Mideast, makes up 15%.

Europe hasn’t changed much in ten years, accounting for 28% in 1999 and 25% today. Latin America is the other region of the globe worth considering, up from 2% in 1999 to 5% today.

How do you invest globally? There are mutual funds that invest in specific countries, in regions, internationally, or globally. I don’t really like the country funds, as I don’t know which countries I should be underweighting or overweighting. Besides, creating a global index using country funds can be a lot of work and expense.

Using regional funds is an easier way to invest in international stocks. To allocate according to the global capitalization percentages above, you would include four mutual funds in your stock portfolio: one U. S. fund, a European fund, an Asian fund, and a Latin American fund. The managers will decide which countries and companies within those regions to hold in the fund.

If you want a little more simplicity, another option is to hold one U. S. fund and one international fund.

Finally, if you have a small amount of money to invest or just don’t want the hassle of having a lot of mutual funds, pick a good global fund. The difference between an “international” fund and a “global” fund is that a global fund will own U. S. stocks where an international fund won’t. First Eagle Global comes to mind as one of the better “one size fits all” global funds that will invest in a mixture of countries, including the U. S.

It isn’t necessary to allocate your stocks strictly according to global capitalization percentages. What matters, whether you decide to own country, regional, international, or global funds, is that you diversify your stock portfolio globally. In today’s world, it’s an important component of diversified investing.

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3 Responses to Diversify With Global Investing

  1. Wade Dombeck October 10, 2010 at 10:50 am #

    During the recent downturn, my family and I have gotten over our heads in alot of debt. I have been told that the best way to get out of debt is to get off of the large credit card debt and to consolidate the debt into a single, larger loan than has a lower, in some cases much lower, interest rate. Is there any truth to this, or is this just a sales job from some aggressive banker?

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