In the first two parts of this series, we've looked at why it's smart to build your portfolio around solid large-cap stocks and taken up the hot topics of market turbulence and portfolio construction. In this final installment, we look to foreign shores and ask: How much of a new investor's portfolio should be allocated to international stocks?
I won't keep you in suspense. The answer: Just as much as the portfolio of someone who has been investing for many years.
Play the percentages
The dollar amount you have to plunk down on foreign equities is likely to be much smaller than that of a more seasoned investor. But as a percentage of your portfolio, the amount you allocate shouldn't be affected by how long you've been plowing money into the market.
Instead, the art (and science) of international investing lies first in determining the level and then the type of foreign exposure that's appropriate to your investing temperament, as well as your time and inclination for research.
Diving in
Generally speaking, more aggressive investors should feel more comfortable dedicating bigger chunks of their portfolio to foreign stocks, but even conservative types will want some portion of their portfolio invested abroad. Diversifying into investments that don't move in tandem with the domestic stock market, after all, makes sense for anyone who wants to enjoy a smoother ride on the way to retirement bliss.
Each of our Champion Funds model portfolios, for example, includes foreign equities. That exposure comes through grade-A actively managed funds, but if you're looking for a no-muss, no-fuss way of adding a dollop of international equities to your mix, there are worthwhile index options, too. Fidelity's Spartan International Index (FUND:FSIIX) -- with a dirt cheap expense ratio of just 0.10% -- tracks the MSCI EAFE, a benchmark that essentially serves as the S&P 500 of foreign stocks and includes such familiar names as GlaxoSmithKline (NYSE:GSK), Toyota (NYSE:TM), and Vodafone (NYSE:VOD).
Clearing the hurdle
To invest in Spartan International, you'll have to pony up a $10,000 initial investment minimum. If that's too rich for your blood right now -- or if 10 grand would represent far more of your portfolio than you're comfortable allocating to international equities -- then not to worry. Just $3,000 will get you into Vanguard's Total International Stock Index (FUND:VGTSX). And while you'll have to pay brokerage fees to buy and sell it, the iShares MSCI EAFE Index (AMEX:EFA) exchange-traded fund has no investment minimum and sports an expense ratio of 0.365%. (Learn more about ETFs in our ETF Center.)
The American way
Last but not least, we have American Depositary Receipts (ADRs). My colleague Rich Smith provides the Fool scoop here, but the short story is that ADRs make it easy for U.S. citizens to invest directly in individual foreign equities. All it will cost you to do so (beyond the company's share price, of course) is the commissions you'll pay -- and the extra research time you'll need to put in.
Plain and simple: Investing in individual stocks is inherently riskier than sinking your money into a well-diversified basket of them. That's true, by the way, whether you're an investing neophyte or an old hand, but make no mistake: Funds aren't volatility-free, either.
The Foolish final word
Ready to dive into international waters? If you would like a little more guidance, our newest newsletter service, Global Gains, will do the trick. If you're just getting started, the online resources and discussion boards will provide enough information to help you navigate into overseas territory.
This article has been updated by Foolish research associate Katrina Chan and was originally published on July 20, 2006, by Shannon Zimmerman. Katrina does not own shares in any of the companies mentioned.
Vodafone is an Inside Value recommendation, GlaxoSmithKline is an Income Investor pick. The Fool has a strict disclosure policy.
