Foreign Allocations: Ask the Experts

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Foreign Allocations: Ask the Experts

Morningstar’s Lifetime Allocation Indexes, developed in conjunction with asset-allocation specialist Ibbotson Associates, provide additional intelligence about what’s a reasonable foreign/domestic split.

In general, it’s worth noting that these benchmarks are much less foreign-stock-heavy than is the case with global market benchmarks such as the FTSE All-World Index. For example, the portfolios geared toward investors who are just starting out steer roughly 40% of their equity assets toward foreign stocks as of this writing, and those weightings step down dramatically for those nearing and in retirement. For people with 10–15 years until retirement, the indexes’ foreign stakes compose roughly 30% of the overall equity allocation as of this writing, and drop to 20–25% of equity for those who are already retired.

Risk factors to watch for

One of the key rationales for a lower foreign-stock allocation in retirement is currency risk. Because foreign assets are not denominated in dollars, there’s a chance that foreign currencies could dip as an investor approaches retirement, thereby depressing the purchasing power of a heavily globalized portfolio at an inopportune time. Of course, those currency swings can work the other way, too. But the bottom line is that currency risk is a wild card that’s completely out of your control, and you’re better off reducing any such risks as retirement draws near.

A checkup of target-date funds’ average foreign allocations yields weightings that are in a similar range, roughly one third of the overall equity portfolio as of this writing. As is the case with Morningstar’s Lifetime Allocation Indexes, foreign stocks consume a larger share (close to 40%) of the equity portfolios for younger investors than is the case for investors closing in on retirement.