Financial Architects

  • Home
  • About Us
  • Services
  • Resources
  • Ruminations Blog
  • Contact Us

September 1, 2018 by David E. Hultstrom

Philosophy of Foreign Investing

  1. The reason to diversify internationally is not because expected returns are higher on foreign* investments, but because they will be different. Diversification is about risk reduction, not return enhancement.
  2. Hedging currency risk is optional in equities but essential in fixed income.
  3. The belief that foreign holdings are unnecessary because domestic companies have large foreign sales, operations, subsidiaries, etc. is a canard. You could also only invest in every other stock in the S&P 500 – but why?
  4. In (academic) theory portfolios should be market cap weighted (currently 54% US, 34% foreign developed, and 12% emerging markets).
  5. Reasons for US investors to hold less than market cap weights in foreign stocks:
    1. Diminishing marginal benefit from diversification – the biggest “bang for the (diversification) buck” is from the initial exposures
    2. Maximizing happiness (i.e. minimizing tracking error) – US investors are typically “benchmarking” off of the S&P 500 (or off of people who are doing so)
    3. Hedging – competitors for (retirement) resources are generally overweight domestic equities
  6. Reasons for US investors to hold more than market cap weights in foreign stocks:
    1. Other exposures (real estate, human capital, pensions, SS, etc.) are generally domestic
  7. In our experience, knowledgeable and prudent portfolio managers typically allocate 20-30% of the equity portion of a portfolio to foreign equities.
  8. Our foreign allocation is 25% of investment grade fixed income and 25% of equities (20% of “risky”) but with a more concentrated dosage than typical in the equity positions.

*The investment industry for some inexplicable reason uses the term “international” to mean “foreign” and are then are forced to use “global” to mean “international.”  I will use “foreign” when I mean “foreign.”

Filed Under: uncategorized

RSS Feed

Brochure

Join Our List

Sign up to receive our newsletter "Financial Foundations" and stay informed of important financial planning and wealth management strategies.

Recent Posts

  • What’s the Market Going to Do?
  • Fall Ruminations
  • Good Portfolios Frequently Look Bad
  • “Good With Money”
  • Summer Ruminations

© Copyright 2001-2019 Financial Architects, LLC All rights reserved.

  • Disclaimer
  • Disclosure
  • Privacy