The financial press has jumped on the bandwagon yelling, "Sell, sell, sell!" for international stocks, especially in Europe. So our clients ask:
- How much should I have invested internationally?
- How about Europe?
- How does Berno Financial Management decide how much to invest internationally?
- What do other large advisors do?
At Berno Financial Management, we use a multi-asset class strategy for broad diversification. A truly global stock portfolio would be invested about 45% in U.S. stocks and about 55% in international stocks, including about 23% in Europe. Few U.S. investors have that much in international stocks, primarily due to currency and political risk. Our current model portfolio asset allocation includes 30% of the stock portfolio being invested in international stocks. This is our subjective target based on a balancing act to achieve optimum returns within a reasonable risk level. Our core international stock funds have slightly less than 45% of their assets invested in Europe, so a typical client's European investments are about 10% to 15% of their total stock investments (and even less of their total portfolio when including bonds and cash).
What do the big boys do? We cite two examples.
First is TIAA-CREF, which is a large private pension plan available primarily to employees of non-profit groups like universities and hospitals. Being academically minded, they have the best of resources available to them. The CREF Fund (College Retirement Equities Fund), which has about $100 billion in assets and is one of the largest private pension funds in the country, is invested 70% in U.S. stocks and 30% in international stocks. For the record, and this is the truth, we discovered this after we had set our model allocation. We are not copycats!
Second is The Vanguard Group, one of the largest providers of mutual funds for retirement plans. Their Target Date Retirement Funds and Lifestrategy Funds are very popular in 401(k)s and IRAs and have about $118 billion in assets. Their stock allocation likewise is 70% U.S. stocks and 30% international. They actually just increased the international allocation to 30% within the past few years, so we were ahead of them!
So rest easy and sleep well. Broad diversification is your friend. Remember a few years ago when investors were questioning Real Estate Investment Trusts (REITs)? They have turned out to be among the best asset classes after many investors bailed out.
If over $200 billion in assets at two of the largest retirement plan providers in the country have 30% of stocks in international investments, we think you can rest assured that this is a reasonable strategy for you as well!
About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.