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What Percentage of Your Assets Should be in the US Stock Market?

by Ryan Guina

Asset allocation is as much an art as a science. If you ask 20 different financial planners how you should allocate your assets, you will probably get 20 different answers – even with the assumption that all things are equal (total assets, income, age, and other factors).

Should your investment portfolio be primarily in the US Stock Market?

Should the US Stock market dominate your investment portfolio?

There are, of course, some similarities. Most financial planners recommend a diversification strategy that incorporates a range of asset classes such as stocks, bonds, and other investments that meets your risk tolerance and investment goals. But the details of how to get there often differ.

Today I have a reader question about asset allocation and why many financial planners recommend a majority of assets be allocated in the US stock market.

Should You Invest Primarily in the US Stock Market?

This question comes from a regular reader named Dan:

Question: I have a general question on investing that I thought I would send your way: I have been meeting lately with a financial planner regarding a 401k rollover. The subject of domestic vs. international allocation came up in one of our discussions. He, like most advisers in the U.S., believe in putting the majority of your stock allocation in the US stock market and a smaller percentage into foreign funds (I agree with this approach). But why is this the conventional wisdom? Is it because the U.S. is still the largest economy in the world with most of the best and brightest companies? Or are we being homers to some extent?

What about a Japanese man about my age also planning for retirement – would his Japanese investor tell him the same thing: put most of your stock in U.S. with a smaller percentage in Euro and Pacific Rim? Or would he advise him to invest mostly in Pacific with a smaller percentage in U.S.? If the former, then he agrees with U.S. investors. If the latter, then who’s being the smart investor and who’s being the homer? Disregarding taxes, all things should be equal: It shouldn’t matter where you live – if the S&P goes up 10%, it goes up 10% for everyone. Therefore everyone should have a similar investment strategy given the same financial goal.

Domestic vs. International Asset Allocation – Which is Best?

I don’t have a clear answer for this question. My initial response is that there are probably several factors at play, mostly related to the currency the investments are based in, familiarity with the companies and investments, and possibly taxes. But it could just be because that is how most people have always done it.

What are your thoughts about asset allocation? Should the majority of your investments should be based in the US? What percentage should be US based?

Image source: Wikipedia.


Published or updated November 28, 2012.
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{ 5 comments… read them below or add one }

1 Hank

There are a lot of behavioral biases involved in our love of US stocks over their international counterparts. Some of the biases we fall prey to… It’s un-American to buy more international…sad, but true. We feel bad being over weighted in international stocks despite the fact that American stocks are fewer in total number of stock markets, stocks, etc.

We benchmark our total investments against US indices such as the Dow and the S&P 500. It is easier for financial planners to have your investments track close to those benchmarks in the US market if you are over weighted in with US stocks.

Domestic stocks are what we as Americans know. It is harder to keep track of international companies and products and much easier to monitor US companies and investments. Like Buffet we try and buy what we know and understand….that’s typically not foreign companies and stocks.

One great thing about globalization now though is that most US companies have such a large portion of their business overseas. So, you still get international exposure with domestic stocks.

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2 Ryan

Definitely love the last point. There are quite a few US based companies that have substantial overseas exposure. Investing in those companies can help insulate your portfolio against a US recession (but perhaps not an international recession).

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3 RJ Weiss

If you’re looking for a general rule, I probably say around 20%-30% of stock allocation should be international.

It’s not as big of deal as you might think though. Like Hank said most U.S. based companies are so international these days that you already have diversification built into domestic stocks.

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4 Manshu

That is a very smart question, and I congratulate Ryan on having such intelligent readers.

Being from India, I have a slightly different take on this, but first let me state that when you are thinking about equity allocation, it is imperative that you think about what percentage of your total assets do you have in equity. Where is the rest of your money at? If it is in something safe like T Bills then you could probably do with a little more international exposure than someone who is all in equity.

Coming back to the point of being a homer, I think everyone is to some degree. In fact, it will be surprising for most Americans, but a lot of western markets are considered stagnant by investors from emerging markets. It is just a perspective of someone far away, who sees returns in one market and then compares it to another for a number of years.

People in emerging markets who have been witnessing consistent growth for the past few decades find it hard to share the skepticism that someone in US has for emerging markets. They are just more used to their own markets, and know first hand what things are like. Personally, I have an option of investing all my money in US or India, and I happily choose India for the most part. But would I invest all of it or even half of it in Brazil, Russia, or China? Absolutely not. I just couldn’t do it, I am a big homer, and I suspect all of us are to some degree.

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5 Daddy Paul

Your question is a very good one. By investing the S&P 500 you get a lot of international exposure because companies like walmart operate globally. Some global funds have 80% of their assets in North America. I like to keep 30 percent in global funds. That said my largest holding Gabelli Asset fund is a domestic fund but has at least 20% in other markets.

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