How much to invest abroad still a perplexing question

Academics' studies offer little help to the average investor

Dollars & Sense

April 08, 2001|By Gregg Wolper | Gregg Wolper,MORNINGSTAR.COM

A perplexing question facing U.S.-based investors is how much of their assets - if any - to invest abroad. Unfortunately, there's no firm answer that applies across the board.

Plenty of folks have taken a shot. Academics and brokerage-house researchers, for example, have investigated the issue and determined a variety of "correct" allocations. But their reports are of little help to ordinary investors.

Morningstar's John Rekenthaler, who (oddly enough) enjoys reading obscure financial research laden with complex mathematical formulas, says that in more than a decade of devouring such studies he has never seen one that has made a persuasive case in favor of a particular allocation.

The main reason is that the studies look at past performance during a particular period. So if foreign markets have performed well during the stretch under consideration, the recommended allocation tends to be fairly high, and vice versa. For that reason, the studies come up with very different allocations depending on which period they cover.

Even if all the studies recommended the same percentage, their findings would be of questionable value for making future investment decisions. That's because the foreign stock market landscape has changed significantly in recent years. Just a few years ago, most large European companies - the type that in the United States would have been actively traded blue chips - were either owned by governments or controlled by wealthy families. Such companies had few, if any, shares listed on an exchange. Only a minuscule number of Europeans owned stocks or mutual funds of any type.

Those traits have been changing, and the transformation is likely to continue. So research that relies on data from past decades is of doubtful relevance.

Another impediment to determining a one-size-fits-all foreign allocation is the variety of stocks and countries constituting the global-investment landscape, each carrying a different level of risk.

Moreover, it's impossible to recommend a proper international percentage without accounting for an investor's personal preference. Some folks are extremely uncomfortable investing in anything outside the United States, because they fret constantly about such issues as currency fluctuation and political instability. For these people, the proper foreign allocation might be zero.

On the other hand, others could worry that by having all of their investments, plus their house and their job, tied up in the United States, they're placing too much faith in the health of one country's economy and market. Those folks would be better off with a significant foreign allocation.

In short, an infinite variety of options are available. Determining the proper amounts and components is purely up to you.

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