How are you planning to spend your retirement? Sailing in the Greek isles? Learning to cook while living in a Tuscan villa? Perfecting your golf game in Scotland? Skiing in the Swiss Alps? Or maybe just lying on the beach in Bali?
If your dreams include these or any other exotic adventures, you can't afford to wait until retirement to start exploring the world. It's time to pack your bags now--at least as far as your portfolio is concerned.
When your grandparents started saving for retirement, international investing wasn't much of an option. Their choices--if any--were limited to a handful of international mutual funds and big global companies with shares trading in New York. And back then, brokers and other financial advisers didn't have decades of academic research to draw upon or fancy Powerpoint presentations to illustrate the case for going global.
International investing has come a long way in recent years. In 1985, there were fewer than 50 global mutual funds to choose from, with combined assets of about $8 billion, according to the Investment Company Institute. Now there are more than 800 funds, representing closer to $1 trillion.
Your grandfather's plain-vanilla global mutual fund has been replaced by a dizzying array of exchange-traded funds, American depositary receipts, closed-end funds and specialized regional or single-country mutual funds. Getting exposure to global markets from Stockholm to Shanghai is as easy as buying shares of IBM (nyse: IBM - news - people ), and as time goes by even more offerings are sure to be on the way. Discount brokers such as E-Trade, for example, are already experimenting with ways to trade stocks listed on foreign exchanges directly from your laptop.
Trouble is, even though the current generation of investors is spoiled for choice when it comes to international markets, most folks still keep the vast majority of their money at home, just like Grandma and Grandpa did.
Sure, lots of Americans have dabbled in foreign stocks or funds, but how many have actually built truly global portfolios? It's hard to say, but based on some data that I've seen and tons of anecdotal evidence, my guess is very few. And during a market panic like the one we've seen this summer, I wouldn't be surprised to see more investors cutting back on international exposure, especially when it comes to "serious money" like 401(k) plans and other retirement accounts.
There are a few problems with this view. For starters, most Americans are already way too dependent on the U.S. economy. We own homes here and we work for companies that are based here. Before we invest a single dime of our savings, we are 100% exposed to the U.S. market. So if you only had 10% or 15% of your stock portfolio invested overseas before the subprime mess started to unfold and you start cutting back now, chances are you'll end up with almost negligible international exposure in a holistic sense.
So how much is enough? The answer will vary depending on your circumstances, but I think you need at least 20% in international stocks to even begin making a difference.
Consider the following example. Say your net worth is $1 million, half of which is a home (no mortgage) and the other half is an investment portfolio. And let's say the portfolio has 60% in stocks and 40% in bonds, cash and other investments.
That leaves you with $300,000 to put to work in stocks. If you're only investing 10% of that amount internationally, you're down to $30,000 to play with overseas. So you've really only diversified a mere 3% of your net worth outside the U.S.
Jeremy Siegel, a professor of finance at the Wharton School, argues that at least 40% of your stock portfolio should be allocated overseas. I think you can go as high as 50% if you're not planning to retire for another 20 years or more.
Sound too risky?
It's not as far-fetched as it may seem. The U.S. represents about half of the world's market capitalization, so by that measure, a 50% allocation overseas would be just about right. And it's hardly a new concept. European investors in Switzerland, the Netherlands and other smaller markets have long taken a global approach to investing. Try asking someone from Sweden or Belgium if they think global investing is "risky." Warning: They might look at you like you're from outer space.
Part of the problem is that somewhere along the line we learned to associate "foreign" with "risky." Sure, Nigerian small-cap stocks might not be the best place to park your 401(k). But you can also lose your shirt investing in shares of a penny stock that's located in your hometown. The real risk is keeping too much of your money at home.
Don't get me wrong. I'm not one of those gloom and doom conspiracy theorists who think America is about to go the way of the Roman Empire. But when I look overseas, I see too many opportunities to ignore.
International stocks have performed well in recent years, but they still offer one of the best combinations of value and growth that you can find in any asset class. U.S. stocks are trading at 16 times 2007 estimated earnings, with expected earnings growth in the 7% neighborhood. Compare this with emerging markets, where stocks trade for about 14 times earnings and offer 15% growth. Even stodgy old Europe is on course to deliver better earnings growth than the U.S.--and it's cheaper too, at 14 times earnings.
Planning for retirement involves making a lot of assumptions about the future. It's tough enough predicting what the economy and markets will do next quarter, let alone several decades from now.
But there's one thing I can almost guarantee. The forces of globalization will continue to boost the importance of international markets, particularly emerging economic powers like China and India. Now is the time to make sure your retirement portfolio has a meaningful stake in these markets of the future.
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If your dreams include these or any other exotic adventures, you can't afford to wait until retirement to start exploring the world. It's time to pack your bags now--at least as far as your portfolio is concerned.
When your grandparents started saving for retirement, international investing wasn't much of an option. Their choices--if any--were limited to a handful of international mutual funds and big global companies with shares trading in New York. And back then, brokers and other financial advisers didn't have decades of academic research to draw upon or fancy Powerpoint presentations to illustrate the case for going global.
International investing has come a long way in recent years. In 1985, there were fewer than 50 global mutual funds to choose from, with combined assets of about $8 billion, according to the Investment Company Institute. Now there are more than 800 funds, representing closer to $1 trillion.
Your grandfather's plain-vanilla global mutual fund has been replaced by a dizzying array of exchange-traded funds, American depositary receipts, closed-end funds and specialized regional or single-country mutual funds. Getting exposure to global markets from Stockholm to Shanghai is as easy as buying shares of IBM (nyse: IBM - news - people ), and as time goes by even more offerings are sure to be on the way. Discount brokers such as E-Trade, for example, are already experimenting with ways to trade stocks listed on foreign exchanges directly from your laptop.
Trouble is, even though the current generation of investors is spoiled for choice when it comes to international markets, most folks still keep the vast majority of their money at home, just like Grandma and Grandpa did.
Sure, lots of Americans have dabbled in foreign stocks or funds, but how many have actually built truly global portfolios? It's hard to say, but based on some data that I've seen and tons of anecdotal evidence, my guess is very few. And during a market panic like the one we've seen this summer, I wouldn't be surprised to see more investors cutting back on international exposure, especially when it comes to "serious money" like 401(k) plans and other retirement accounts.
There are a few problems with this view. For starters, most Americans are already way too dependent on the U.S. economy. We own homes here and we work for companies that are based here. Before we invest a single dime of our savings, we are 100% exposed to the U.S. market. So if you only had 10% or 15% of your stock portfolio invested overseas before the subprime mess started to unfold and you start cutting back now, chances are you'll end up with almost negligible international exposure in a holistic sense.
So how much is enough? The answer will vary depending on your circumstances, but I think you need at least 20% in international stocks to even begin making a difference.
Consider the following example. Say your net worth is $1 million, half of which is a home (no mortgage) and the other half is an investment portfolio. And let's say the portfolio has 60% in stocks and 40% in bonds, cash and other investments.
That leaves you with $300,000 to put to work in stocks. If you're only investing 10% of that amount internationally, you're down to $30,000 to play with overseas. So you've really only diversified a mere 3% of your net worth outside the U.S.
Jeremy Siegel, a professor of finance at the Wharton School, argues that at least 40% of your stock portfolio should be allocated overseas. I think you can go as high as 50% if you're not planning to retire for another 20 years or more.
Sound too risky?
It's not as far-fetched as it may seem. The U.S. represents about half of the world's market capitalization, so by that measure, a 50% allocation overseas would be just about right. And it's hardly a new concept. European investors in Switzerland, the Netherlands and other smaller markets have long taken a global approach to investing. Try asking someone from Sweden or Belgium if they think global investing is "risky." Warning: They might look at you like you're from outer space.
Part of the problem is that somewhere along the line we learned to associate "foreign" with "risky." Sure, Nigerian small-cap stocks might not be the best place to park your 401(k). But you can also lose your shirt investing in shares of a penny stock that's located in your hometown. The real risk is keeping too much of your money at home.
Don't get me wrong. I'm not one of those gloom and doom conspiracy theorists who think America is about to go the way of the Roman Empire. But when I look overseas, I see too many opportunities to ignore.
International stocks have performed well in recent years, but they still offer one of the best combinations of value and growth that you can find in any asset class. U.S. stocks are trading at 16 times 2007 estimated earnings, with expected earnings growth in the 7% neighborhood. Compare this with emerging markets, where stocks trade for about 14 times earnings and offer 15% growth. Even stodgy old Europe is on course to deliver better earnings growth than the U.S.--and it's cheaper too, at 14 times earnings.
Planning for retirement involves making a lot of assumptions about the future. It's tough enough predicting what the economy and markets will do next quarter, let alone several decades from now.
But there's one thing I can almost guarantee. The forces of globalization will continue to boost the importance of international markets, particularly emerging economic powers like China and India. Now is the time to make sure your retirement portfolio has a meaningful stake in these markets of the future.
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