Sunday, September 4, 2011

Yet Another Reason to Invest Internationally

Do you know what percent of the global stock market is comprised of companies based in the United States? Depending on the data you review, it somewhere between 35% and 40%. How much of your portfolio is made up of US stocks? I would anticipate that it's in excess of 50%.

Most investors are prone to domestic bias. This means that the percent of stocks they own is over weighted to their home country. If you live in Japan, you are tilted toward Japanese stocks. If you live in Germany, you own more German stocks. If you live in the United States, you own more American stocks.

Investors who want to own stocks based on global market capitalization should own no more than 35%-40% of stocks based in the U.S.

The Federal Reserve Bank of San Francisco has given investors a compelling reason to diversify away from U.S. stocks. Fed adviser Zheng Liu and researcher Mark Spiegel suggest in a recent paper that aging baby boomer will dampen U.S. stock values for the next few decades as they sell their investments to finance retirement. (Source: Bloomberg New)

“U.S. equity values have been closely related to demographic trends in the past half century. In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values.”

So, consider shifting the equity portion of your portfolio away from U.S. stocks to international stocks.