Experts advise increasing foreign allocation
I've been doing this on my own for the past three or four years, and lots of other people have been doing the same this year (judging by the massive inflow into international stock funds compared to U.S. funds) but many financial planners and Wall Street strategists are now officially telling their customers to bump up their exposure to foreign equities.
The Wall Street Journal's Eleanor Laise has the story ("Foreign Stocks Get New Push," Nov. 8, p. D1). She says JP Morgan has advised increasing exposure to foreign stocks to 33% from 20%. Standard & Poors investment policy committee has raised its recommended international stock allocation from 15% to 20%.
If you are interested in increasing your foreign exposure, you should consider a few things. First, there is more risk involved, particularly in those markets that do not have transparency in financial regulations or strict accounting rules relating to public declaration of earnings. Second, there are established foreign markets like Japan and Canada, and then there are emerging markets, which are subject to political and economic instability. For instance, a lot of people (myself included) invested in Asian stock funds in the early 90s when prospects there looked extremely good, only to suffer during the Asian financial crisis later in the decade. Right now, some wild cards to keep an eye on are a bird flu outbreak among humans and the potential for social unrest in China, either of which could have a significant impact on international stock markets. Investing in international stocks this decade has so far been very profitable for me, but I am keeping a close eye on these issues.
Jonathon Clements of the Wall Street Journal brings up another point about emerging markets ("Don't Get Caught Up in the Hype Over Emerging Market Investments", Nov. 2, Page D1) and that is that stellar economic growth in a certain market does not necessarily translate to stellar stock market returns. This is something to keep in mind if you want to buy an index fund or ETF that's based on a foreign country's stock market index, but that's kind of a simplistic argument for actively managed funds -- emerging market fund managers don't make purchases based solely on projected economic growth of a particular market, but rather the fundamentals of individual companies and their prospects for growth.
You may already have a lot of exposure to international stocks through your existing mutual fund holdings. A few months ago I used Fidelity's portfolio analyzer to measure my exposure to foreign stocks, and other mutual fund companies offer similar services. After plugging your holdings into these tools, you find that your international exposure is not at the level you'd like, consider a portfolio re-allocation -- but only after carefully evaluating your own appetite for risk, and carefully researching the international funds and fund managers.
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