What proportion of your investment portfolio is in U.S. stocks? Half? Two-thirds? More?
Chances are, you should reduce your exposure to U.S. stocks a bit. Or even a lot. In his latest book, When Markets Collide, Mohamed El-Erian says the proper weight of U.S. stocks in a long-term investor's portfolio is only 15%!
What about the other 85%?
"U.S.-based individual investors have too much invested in the U.S. and not enough internationally. That exposes them to significant risk in this world," El-Erian told Barron's recently. He suggests the following allocation:
|
Equities
|
49%
|
U.S.
|
15%
|
Other Advanced Economies
|
15%
|
Emerging Economies
|
12%
|
Private
|
7%
|
|
Other Asset Classes
(bonds, real assets, etc.) and special opportunities
|
49%
|
Expected Long-Term Real Return
|
5%-7%
|
Source: When Markets Collide.
So who is this guy? Why should you pay any attention to his recommendations? He is co-CEO and co-chief investment officer of PIMCO, one of the largest bond managers in the world, and is ultimately responsible for more than $800 billion in assets under management.
And lest you think his expertise is contained to the bond world, you should know he returned to PIMCO in 2008 after two years at the head of Harvard's endowment fund. Harvard invests across the full spectrum of asset types, and in its last fiscal year under his leadership, the fund grew 23% to reach $34.9 billion -- a remarkable performance that substantially beat its market and internal benchmarks.
In other words, he might be on to something.
What's Your IQ?
So, what's your IQ (international quotient)? Look at the following table of blue-chip U.S. companies and their foreign counterparts. How many names in the second column do you recognize?
|
U.S. Company
|
Foreign
Counterpart
|
Headquarters
|
Foreign Counterpart
Market Cap
|
|
Abercrombie & Fitch
(NYSE: ANF)
|
Hennes & Mauritz
|
Sweden
|
$44 billion
|
|
Wal-Mart (NYSE: WMT)
|
Carrefour
|
France
|
$46 billion
|
|
Kraft Foods (NYSE: KFT)
|
Groupe Danone
|
France
|
$39 billion
|
|
ExxonMobil (NYSE: XOM)
|
Reliance Industries
|
India
|
$77 billion
|
|
Johnson & Johnson (NYSE: JNJ)
|
Alcon (NYSE: ACL)
|
Switzerland
|
$49 billion
|
|
American International
Group (NYSE: AIG)
|
Ping An Insurance Group
|
China
|
$56 billion
|
Source: Yahoo! Finance.
While no one is suggesting you need to dump most of your U.S. stock holdings immediately, it's likely that your portfolio would benefit from more exposure to non-U.S. stocks.
The Foolish bottom line
There's a natural bias toward investing in your home market -- and that bias has served U.S. investors pretty well over the last century. In this new century, however, international stocks can no longer be considered peripheral; they've become a core element of a sound long-term investment strategy.
And that leaves individual investors with a real challenge. Investing abroad presents a whole new set of risks and caveats -- not to mention tax issues. One solution might be to invest more heavily in U.S. companies that earn (or expect to earn) a significant proportion of their revenues abroad.
But if you'd like to invest in companies based outside the United States, another option is to subscribe to the Motley Fool's Global Gains investment service, and let Bill Mann and his team do the legwork for you.
We mean that literally. Bill and co. just returned from a tour of Asia where they visited promising, solid companies and ferreted out new investment opportunities. If your portfolio could use more foreign flavor, sign up for a 30-day free trial.
Alex Dumortier
, CFA, owns shares of Wal-Mart but no other companies mentioned in this article. Kraft and Johnson & Johnson are Motley Fool Income Investor recommendations. Wal-Mart is an Inside Value selection. The Fool has a disclosure policy.
Terms & Conditions
RSS Headlines
Fool UK