International Diversification: Example Portfolios

3 Sample Portfolios for International Investors

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Most investors are aware of the benefits of international diversification, but it can be difficult to put into practice. After all, there are hundreds of different countries that may be very unfamiliar to those living in the United States. Exchange-traded funds (“ETFs”) have made the process of investing internationally much easier by aggregating stocks and bonds into diversified portfolios that can be bought and sold like any other U.S. equity.

In this article, we will look at some example portfolios that incorporate international ETFs based on an investor’s demographics and objectives.

Young Investors: Up to 35

Most financial advisors recommend that younger investors assume more risk in their portfolios since they have a longer time horizon. While riskier investments — like equities — may experience more short-term volatility, they tend to outperform less risky investments — like bonds — over the long-term. Young investors that don’t plan on selling for several decades are typically best off with riskier investment classes for these reasons.

When it comes to international investing, these risky investments include emerging market and frontier market equities and bonds. The countries that fall into these categories have faster growing economies than developed countries, but may experience more short-term volatility from heightened political risk, currency risk, and other factors.

Young investors can benefit from these dynamics by increasing allocations to these asset classes.

An example young investor portfolio might include:

ETFClassAllocation
Vanguard Total Stock Market ETF (VTI)US Equities40 Percent 
Vanguard FTSE Developed Markets ETF (VEA)International Equities40 Percent
Vanguard FTSE Emerging Markets ETF (VWO)Emerging Market Equities10 Percent
iShares Emerging Market Bond ETF (EMB)Emerging Market Bonds10 Percent

 

Middle Age Investors: 35 – 65

Middle age investors should focus on a balance between growth and income. While they still have time to ride out volatility, the goal is starting to shift from capital gains to capital preservation as retirement approaches. Bonds and other fixed income investments help provide greater certainty, while blue-chip dividend and value stocks may be appropriate to reduce risk and volatility in the equity portion of a portfolio.

In the context of international investing, middle age investors may want to consider reducing exposure to emerging and frontier markets and increasing exposure to developed markets. They may also want to consider building international bond exposure as a way to diversify fixed income risks away from the United States. These approaches typically result in lower portfolio volatility and ongoing attractive income over time.

An example middle age investor portfolio might include:

ETFClassAllocation
Vanguard Total Stock Market ETF (VTI)US Equities45 Percent
Vanguard FTSE Developed Markets ETF (VEA)International Equities15 Percent
Vanguard US Total Bond ETF (BND)US Bonds25 Percent
Vanguard Total International Bond ETF (BNDX)International Bonds15 Percent

 

Retirement Investors: 65 and Over

Retirement investors usually prioritize low-risk income investments given their short time horizon. During this time, the investment objective switches from capital gains to capital preservation since the goal is to ensure there’s enough income to meet retirement needs. Bonds are the most popular way to achieve these goals since they rarely default and provide a steady source of income over time.

When investing internationally, retirement investors may want to consider some exposure to foreign fixed income investments. These investments may diversify away from interest rate risk in the United States, although it’s important to consider any foreign currency risk. Investors need U.S. dollars during their retirement — unless living abroad — which means that currency conversions can become costly if foreign currencies depreciate against the dollar.

An example middle age investor portfolio might include:

ETFClassAllocation
Vanguard US Total Bond Market ETF (BND)US Bonds80 Percent 
Vanguard Total International Bond ETF (BNDX)International Bonds20 Percent

Important Considerations

There is no universally-accepted consensus on the amount of international diversification that’s appropriate for a retirement portfolio. Some financial advisors may deem the figures in these sample portfolios as over-exposed to international assets, while others see them as an appropriate level of diversification. Investors should carefully assess their own situation and comfort level with international investments before making any decisions.

The Bottom Line

Most investors are aware of the benefits of international diversification, but it can be difficult to put the theory into practice. The good news is that international ETFs make it easier than ever to build internationally-diversified portfolios. With the examples in this article, investors can get an idea of what international diversification looks like for various investor demographics.

This article is for informational purposes only. Nothing in this article should be construed as investment advice. Please consult a financial advisor to help develop an optimal portfolio for your individual situation.