International Stock Allocation: 0%, 20%, 50%, or None of the Above?

International Stock

In my last blog posting, “Is it Safe?” I provided a solid rationale for diversifying overseas, despite current headlines. Still, an ongoing stream of uncertainty might have you thinking that it’s time to forget about a significant allocation to foreign stocks and funds. Fearful investors tend to flee to more familiar home turf, but I would propose the best defense to global volatility remains a prudent – and yes, still relatively significant – allocation to foreign holdings that reflects your personal risk tolerance.

Diversifying internationally: “Is it safe?”

Turmoil and uncertainty in international stock markets, particularly in the Eurozone, may have you feeling as exasperated and perplexed as Dustin Hoffman in the 1976 classic movie “Marathon Man.” 

International DiversificationSzell (Laurence Olivier): Is it safe?

Babe (Dustin Hoffman): I don’t know what you mean. I can’t tell you something’s safe or not, unless I know specifically what you’re talking about.

Szell: Is it safe?

Babe: Tell me what the “it” refers to.

Szell: Is it safe?

Babe: Yes, it’s safe, it’s very safe, it’s so safe you wouldn’t believe it.

Szell: Is it safe?

Difference Between Stocks and Bonds

Right now it’s hard to find an investment that makes money.  Safe bonds earn paltry interest and banks pay next to nothing on deposits.  Stocks, while risky, at least pay dividends. You may be wondering whether it is time to boost your allocation to stocks.  The answer is a resounding “maybe.” Before leaping, here are a few things to consider.

Stocks are more volatile than bonds:

No surprise here.  The best and worst 12-month periods across three decades are illustrated by the gray bars below.  (We’ll get to what those orange dots mean in just a second.)

A Better Way to Invest for Retirement

Diversification Investing

Stability, in life and in investing, is a good thing. It reduces your mental anguish by insulating your portfolio from sharp declines. It can also help you produce a fatter portfolio by the time you retire.

“I tell people Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”  — The late Paul Samuelson, Nobel Prize winning economist

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