In foreign stocks, How much is enough?
Determining the “right” allocation to foreign stocks isn’t easy and depends on who you ask.
“I favor a 50/50 split. U.S. stocks make up 49.95% of the MSCI All Country World Index, which is a good benchmark for the global stock universe,” says Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management of San Francisco.
“Looking at economic and financial fundamentals along with technical factors, I think European equities, emerging Asia and emerging Europe will outperform U.S. equities, but emerging South America, Japan, Canada and Australia could underperform the U.S.,” he says. “On balance, that calls for a 50/50 portfolio of U.S. and non-U.S. stocks.”
But financial advisors might not be willing to hold so much in equities outside the United States.
“We suggest that foreign stocks make up 33% of clients’ stock allocations,” says Mark Balasa, co-chief executive and chief investment officer at Balasa Dinverno Foltz, a wealth management firm in Itasca, Ill.
That number is a “balance of world market cap and what our clients will embrace,” he says.
If the foreign stock allocation went above 33%, “a growing number of our clients would notice how different we are than the S&P 500,” in terms of performance, Balasa says.
“A positive difference would be great, but a negative difference might cause some clients to ask, ‘What are you doing?’” he says.
ADJUSTING FOR MULTINATIONALS
Erika Safran, founder of Safran Wealth Advisors in New York, doesn’t allocate quite as much to foreign stocks.
“A 60 /40 portfolio, stocks to bonds, has 10% of the entire portfolio allocated to stocks from [developed] markets and 5% to emerging markets stocks,” she says. “Therefore, such a portfolio would have 25% of its equity portion directly allocated to foreign stocks.”
Safran has kept that type of allocation “pretty steady” throughout the years.
“I recognize that the U.S. represents only 50% of world market cap, but our goal is not to meet world market cap,” she says. “Given continued globalization, many of the companies in the S&P 500 have foreign income, which adds to our clients’ foreign exposure.”
Clients’ circumstances also can affect foreign stock exposure.
“Our allocations across international categories are in the range of 12% to 28%,” says Diahann Lassus, president and co-founder of Lassus Wherley and Associates, a wealth management firm with offices in Bonita Springs, Fla., and New Providence, N.J.
“The variation of the weightings is driven by the client’s comfort level and the necessity for the portfolio to grow over time,” she says. “Typically, we have lower weights to the more volatile international asset classes for clients who are targeting lower volatility and returns.”
Lassus says that her firm is sensitive to risk so portfolio weightings are adjusted to reflect each client’s objectives.
“This generally means lower allocations to international developed and emerging markets and increased allocations to U.S. equities,” she says.
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.