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US and FOREIGN ASSET ALLOCATION

© Kirk Lindstrom

In a previous article, I wrote "Probably the most important investment decision investors can make is determining their asset allocation. Asset allocation is the mixture of stocks, bonds, CDs, money market funds and realestate that one has in their investment portfolio." I also wrote "Investments are stocks, bonds, mutual funds, CDs and anything else that you buy for anticipated appreciation and/or passive income." Once you have determined your equity to fixed income ratio, you need to determine how to allocate those funds between the two categories. This article discusses the "Equity Allocation" of a good, balanced portfolio.

What is a Good Equity Allocation?

I like to think of an equity portfolio as split between "US Equities" and "The rest of the World". This is mostly due to the size of the US market. Investment advisors usually recommend having between seventy five and ninety percent of you equities in the US Stock Market with the remaining invested in the remainder of the World. I lean toward the lower end of this foreign exposure, having maybe 12% in foreign funds, but I have much specific stock risk in a few high tech companies that derive half their income from outside the US of A. Unless you are just starting out in investing, you will probably have to do a similar judgement call. This is why I recommend paying someone by the hour to at least look over your investment plan.

Foreign Asset Allocation

In this article I discuss investing in Europe. I suggest several good, well diversified mutual funds that invest in Europe. These funds are out performing the US S&P500 funds this year as I write this article, but this is not always the case. We are looking to build diversity so often parts of a well diversified portfolio show relative underperformance. I believe investing between five to ten percent of your equity assets in any one of these funds would be a reasonable plan for the long term.

For the remainder of your foreign portfolio, I suggest investing in one or two "International Growth Funds". We have a discussion group titled "Building a stock portfolio" that I suggest you visit and ask others what funds they have tried. The simplest Foreign allocation is one third in Europe and two thirds in International Growth Funds.

Adding Spice to a Portfolio

If you want to add a little spice to your foreign portfolio, then I suggest no more than four percent in a "sector fund" that targets specific parts of the World. I presently have some money in "The Emerging Markets", "The Asian Tigers" and "Global Telecommunications" with the total sum under the "4% limit".

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