How Much Should You Allocate to Foreign Stocks? | Bottom Line Inc (2024)

FAQs

How Much Should You Allocate to Foreign Stocks? | Bottom Line Inc? ›

Depending on your return objectives and risk tolerance, your international allocation should be 5-25% of your total stock market investments and the international weighting necessary for truly global exposure is likely to increase over time as global trends become even more entrenched.

Depending on your return objectives and risk tolerance, your international allocation should be 5-25% of your total stock market investments and the international weighting necessary for truly global exposure is likely to increase over time as global trends become even more entrenched.

For years, a commonly cited rule of thumb has helped simplify asset allocation. According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities.

What's the right number of companies to invest in, even if portfolio size doesn't matter? “Studies show there's statistical significance to the rule of thumb for 20 to 30 stocks to achieve meaningful diversification,” says Aleksandr Spencer, CFA® and chief investment officer at Bogart Wealth.

Concentrated positions of company stock can carry more market risk than a diversified portfolio, coupled with career risk tied to the company. Holding more than 5% to 10% of your portfolio in company stock is a level of concentration that merits attention. Trimming a position of company stock requires careful planning.

In general, Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.

For example, they found that a strategy of investing 50% in domestic stocks and 50% in international stocks throughout one's lifetime generated more wealth at retirement, provided higher initial retirement consumption, was less likely to exhaust savings, and was more likely to leave a large inheritance.

Diversified management investment companies have assets that fall within the 75-5-10 rule. A 75-5-10 diversified management investment company will have 75% of its assets in other issuers and cash, no more than 5% of assets in any one company, and no more than 10% ownership of any company's outstanding voting stock.

A high-level rule of thumb for avoid high levels of concentration is that a single stock should not make up no more than 5% of the overall portfolio. This is known as the 5% rule of diversification.

No single asset can represent more than 10% of the fund's assets; holdings of more than 5% cannot in aggregate exceed 40% of the fund's assets. This is known as the "5/10/40" rule.

What is too much diversification? ›

Over-diversification, or "di-worsification," occurs when additional investments diminish returns without lowering risk significantly. Avoid over-diversification by focusing on high-conviction ideas and managing portfolio size. Motley Fool Issues Rare “All In” Buy Alert.

Some experts recommend investing no more than 10 percent of total investment assets in a single stock, including stock of your company—and that could be too high, depending on your goals and circ*mstances. It's also wise to review your asset mix at least once a year, rebalancing if needed.

An investor will generally require stock in your firm to stay with you until you sell it. However, you may not want to give up a portion of your business. Many advisors suggest that those just starting out should consider giving somewhere between 10 and 20% of ownership.

International stocks offer U.S. investors diversification, reducing reliance on domestic markets and potentially enhancing returns. Non-U.S. stocks can provide exposure to global economic growth, mitigate geopolitical risks and tap into industries not heavily represented domestically.

In short, a review of the three standard approaches to EM allocation suggest global equity investors should allocate somewhere in the range of 13% to 39% to EM. Source: FactSet, MSCI, MSIM calculations.

Second, worldwide diversification allows the stock-bond ratio of a portfolio to be increased without raising the overall risk of the portfolio because returns between the broad US and International markets are not perfectly correlated.

"Moreover, international stocks are substantially undervalued when you look at metrics like price-to-earnings and price-to-book ratios."