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Ask the investment professionals: Do I have enough exposure to international stocks?

Submitted by Brian.Lavelle on September 9, 2019

Charles Schwab Investment Management's Omar Aguilar says many investors are underexposed to non-US equities–and now's the time to fix it.


GRAPHIC: [Ask the investment professionals]

GRAPHIC: [How much exposure should investors have to international equities?]

OMAR: I always try to think of this as, well, out of the last 10 years, you know, the U.S. had led the markets. However, if you actually think about, and this is a true statistic, out of the top 50 stocks that have the best returns year after year, on average, 75% of those are non-U.S. companies.

So, when you think about the impact of international in anybody's life, it's actually more than what you can actually think, and the opportunities for diversification have not changed. 

So, 15% is the average allocation that most U.S. investors have in international assets. Most people think that at least doubling that should be the right norm, 30%. If you go by the global market capitalization, you're talking about 50%. So 50% if you just go by global market cap should be the mix between US and international. Now, when you look at the risk-adjusted returns, given the fact that, yes, it's more expensive to trade international assets, you have to think about the currencies, you have to think about other components, yes, maybe 50% is too much for a lot of people, but 15% is definitely very low.

The biggest driver of the decision to potentially even increase international allocation today, it has to be where the dollar has been. The dollar has been a significant headwind for international investing now for a decade. Now, we're going to an easing cycle. That should actually put pressure on the dollar. That will potentially give more opportunities to international investing. 

And going back to the financial crisis, if you think about the quantitative easing, the biggest beneficiary of the quantitative easing back in 2009, was emerging markets. So just to put that into context. I'm not predicting that emerging markets will actually outperform because we have a trade war going on, but it does provide, at least, the economic framework for international assets to do better, and if you think about valuation, even more.

GRAPHIC: [Own your tomorrow]

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