Why Retirees Should Consider Investing Abroad
Readers say diversification and exposure to good companies call for looking beyond the U.S.
The last thing many retirees want in their investment portfolios is added uncertainty. Yet, when faced with the question of how much of their money to invest outside the U.S., that's just what many find.
On the one hand, investing in foreign equities and bonds provides diversification benefits. A case in point: The average foreign large-blend fund has gained 11.1% so far this year (as of May 14), while the average U.S. large-blend fund has gained just 3.6%. (During the past five years, however, the picture is reversed, with U.S. large-blend funds averaging 14.2% annual gains and foreign large-blend funds averaging 8.9%.) Yet, foreign equities--especially those from emerging markets--can be more volatile than U.S. equities. On the fixed-income side, foreign economies are often less stable than the U.S. economy and can offer a rather bumpy ride, as anyone invested in European bonds over the past few years can attest.
Currency risk only adds to the uncertainty, as a strong dollar has helped reduce the performance of foreign securities denominated in their local currencies. Is it any wonder, then, that some retired investors think twice about investing abroad?
To jump-start our International Investing Week special report, we asked retired Morningstar readers how they approach the question of whether and how much to invest outside the U.S. The full conversation can be found here, and excerpts are below.
'I Still Believe in Diversification'
Many readers responded that, despite recent worries in Europe and other foreign markets, they find foreign equities to be attractively priced.
"I recently moved some money into European index funds, as I see (hope for!) some upside potential there," wrote luckhelps. "I'm not putting a large percentage of my portfolio into foreign investments these days, but I still believe in diversification."
Reader GoldenRetrieve also recently added to his or her foreign holdings.
"While I don't like to 'market-time' my retirement portfolio, there are better and worse times for certain asset classes," the commenter wrote. "I can move a few percentage points into or out of some classes and either de-risk or increase return. Right now, I have added about 5% more to international and reduced some bond holdings."
Even a skeptic like Racqueteer said foreign stocks deserve a look these days.
"Firstly, I'm not a blind supporter of diversity for the mere sake of diversification," Racqueteer wrote. "Europe, for example, is largely going to follow the U.S. in terms of equity results, and U.S. large cap[s] sell internationally. I can see some value in smaller-cap foreign funds as their focus will be internal to foreign markets. And Asia [and] emerging markets, in my opinion, are a different case entirely. So, some exposure there is wise. All that having been said, there will be times where the odds favor foreign exposure in a rising (or stagnant) market. Such a time may be now, with strong dollar effects being likely. Consequently, I have some increased exposure now in foreign funds hedged to the dollar."
'It's a Big World Out There'
Another group of retired readers said that investing abroad is nothing new to them and argued against a U.S.-centric approach.
"Last time I checked, the U.S. didn't have a monopoly on wisdom or on the ability to make money," said uintah. "It's a big world out there. For me, being retired isn't by itself a good reason to ignore more than half of the investment universe. And now, with a strong dollar and foreign stocks cheaper on average than U.S. shares, what's not to like?"
For jjdenver, investing in foreign-stock funds is an easy way to own high-quality non-U.S. companies.
"Of my stock holdings, 32% is international," said jjdenver. "Most is [in] Vanguard Total International Stock Index (VTIAX), plus some foreign exposure in Vanguard Dividend Growth (VDIGX). My feeling is that if I want a piece of Anheuser-Busch Inbev (BUD), Samsung, Toyota (TM), Nestle (NSRGY), Roche Holding (RHHBY), Bayer (BAYRY), and so on, I need funds that invest in international stocks."
A few readers said their faith in foreign investing is the result of having spent a significant amount of time in another country. Kekepana was one.
"Having spent much of my career overseas, I feel uneasy at having most (98%) of my current investments in the United States," the commenter wrote. "It is just a matter of where the most reasonable risks have been. There have been times when I have put upwards of 75% overseas, and I anticipate raising my foreign exposure substantially in the next few months--most likely in Northern Europe and southeast Asia. Just getting ready to pull the trigger."
Another group of readers said they avoid trying to make allocation decisions regarding their foreign holdings. Reader doug5004 said he prefers to let a fund manager make those choices for him.
"I find myself increasingly investing in Morningstar-rated [world-stock] funds, allowing managers with track records to invest for the best long-term opportunity," he wrote.
Others said they prefer foreign or world index funds that provide broad exposure to overseas stocks.
"For international equities, we hold Vanguard Total International Stock Index fund and that position equals 30% of our equity holdings and 15% of the overall portfolio," wrote stagioneestate. "We also have 10% of our bonds in the Vanguard Total International Bond Index fund (VTABX), which is 5% of the overall portfolio. We hold these broad, low-cost funds as strategic diversifiers and don't try to figure economic or market trends (we feel we'd be wrong most of the time)."
Grinder12 takes the simplest approach possible to allocating the equity portion of his portfolio globally.
"All our equity is in one fund-- Vanguard Total World Stock ETF (VT)," he wrote. "It holds [more than 6,000] stocks, including U.S. and non-U.S., which makes me feel safely diversified. An alternative would be to hold equivalent allocations in separate funds for U.S. and non-U.S. and tweak our allocation between them, but I prefer to keep it simple and avoid the temptation of trying to guess which fund would be better to overweight."
'I'll Leave the Foreign Investing to the More Adventurous Retirees'
Although many readers said they haven't shied away from foreign stocks and bonds, others said they have and offered reasons as to why.
For some, it's the belief that the U.S. is simply the best place to invest.
"Three years ago I reduced our foreign investments from 15% to a 10% allocation," wrote Chains, a self-described 72-year-old retired investor. "Even though things have greatly improved globally, I'm in no hurry to ramp back up to the 15% level. Global opportunities are out there, to be sure, especially in the emerging markets and the European Union, but the U.S. market, I believe, is still the best place to invest our money."
Hondo said, "I'll leave the foreign investing to the more adventurous retirees. As for me, I will stick with mostly U.S. investments."
Some retired readers pointed out that, in today's globalized economy, one can get foreign exposure simply by owning U.S.-based multinational companies.
Cyrusandmag wrote, "The large amount of foreign earnings of U.S. corporations satisfies any need that I might have for additional foreign investments. I have had foreign funds in the past and am unable to see any advantages over an [entirely] U.S.A. portfolio."
Hobocon offered a similar take, saying, "I buy American equities and funds, and the earnings from their foreign trade is enough international exposure for me. I have lived in foreign countries for more than 20 years and I have not identified one that I want to invest in."
Not surprisingly, some retired readers said that currency risk is another factor they'd just as soon do without.
"Have temporarily eliminated all foreign equities until the long-range prognosis for the strength of the dollar is clearer," wrote exranger60.
But one reader said the decision of whether and how much to invest abroad should be no different for retirees than for other investors and that currency risk is something he doesn't lose sleep over.
"As a recent retiree I still invest for the long term, both to support my standard of living and to build my portfolio for the next generation," said Juris2. "Currency risk in [the] short or long run is far from the most important factor that affects my choice of investments. ... Yes, exchange rates affect revenues and profits. But over [the] long run I don't worry about currency fluctuations or the volatility that they may bring."
Some comments have been edited for clarity and brevity.
Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.