Q. In a recent column you referred to a 33 percent foreign component of the equity portion of a person's investments as being underweight. While I realize that roughly half the world's equity value is outside the U.S., I thought that 25 to 30 percent foreign is about right.
So, two questions:
(1) What percent foreign (for a moderate/moderately aggressive investor) do you recommend?
(2) With the recent outperformance by foreign equities, is this a good time to rebalance in their favor?
—A.F., by email from Spicewood, TX
A. If we were Martians wanting to invest on Earth, we’d treat all areas equally and try to buy an index fund that represented the “Earth market.” That would be evenhanded investing. One proxy for the Earth market is the iShares MSCI ACWI Index fund ETF. It represents an index of about 85 percent of the global equity market. In that index the U.S. stock market recently accounted for 41.7 percent of all value. All the other markets in the world account for the remaining 58.3 percent.
Download the iShares information sheet on the fund and you’ll find some interesting figures. The U.S. stock market is about 4 times as large as the next largest, Japan. Exxon-Mobil, the largest oil company in the world, has a market value about equal to the entire Chinese stock market.
An investor who had 33 percent of his investments outside the United States and 67 percent in the United States would be significantly “underweighted” in international investments and “overweighted” in domestic investments. In fact, most investors are even more underweighted in international investments.
According to the September Hewitt Associates 401(k) Index, a tool that tracks how 401(k) participants are investing their retirement money, the average plan participant had about 8 percent of account assets in international and emerging market equities. That is far less than the nearly 24 percent they had in domestic equities— and that didn’t include the additional 24 percent they had in company stock. So it’s pretty safe to say that most people are significantly “underweighted” in international equities.
The issue here is not whether you are a moderate or aggressive investor. The issue is whether you think the United States economy is more favorable to private investment than the rest of the world. An increasing number of investors think not, even recognizing the poor protection investors receive in many foreign markets. Here’s a short list of the common reasons:
- Reduced credibility of U.S. corporate management,
- Reduced credibility of U.S. accounting,
- Reduced credibility of U.S. regulation,
- Reduced credibility of U.S. government fiscal management, and
- Fear of a weak domestic economy and a falling dollar.
The argument for international investing can be overstated because major U.S. companies often derive a large portion of their earnings overseas. Coca-Cola, for instance, is a quintessential U.S. company, but it was recently reported that 80 percent of its revenue comes from outside the United States.
Q. I am 73 and have some extra cash in a checking account. My financial advisor is suggesting putting the extra in Templeton Global Bond A. It has a 5-star Morningstar rating. The front-end load is 4.25 percent. Is this a good place to go, or is there something better out there? —G.C. by email
A. It’s hard to question the performance of Templeton Global Bond A shares (ticker: TPINX, expense ratio 0.92 percent). According to Morningstar Principia, it has been in the top 5 percent of competing funds in the last 3, 5, 10, and 15-year periods and ranked at the 13th percentile in the preceding 12 months. The fund is right up there with PIMCO’s Total Return A shares (ticker: PTTAX, expense ratio 0.90 percent).
It also offered a trailing 12-month yield of 7 percent, so you’d recover the 4.25 percent commission and still earn more than you would earn on the average one-year CD (1.7 percent, according to www.bankrate.com) inside a year.
The issue for you is whether this is really “extra cash” in your checking account. If you don’t have a need for it in the near future, it would be good to put it to work. If you have a need for cash in the near future, buying the fund would be foolish because you’d have the certain loss of the commission plus the risk of loss in the event interest rates start to climb.