How much should I have allocated in international equities?

I am a long-term and active investor with a usually low risk profile. One aspect of investing I am not knowledgeable on is international equities. How do I allocate international equities in my portfolio? What are the typical risk levels for investing in these equities?

Investing, International / Global, Stocks
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April 2017
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First of all, there is no such thing as a "typical" risk level. Your risk tolerance is unique. That having been said, there is generally an inverse relationship between risk and return, over time. Someone with a low risk tolerance but with a long investment time horizon may be persuaded to invest in somewhat riskier investments than another investor with a generally higher tolerance for risk, but less time to their goal.

The United States represents about 25% of world GDP and the eight largest economies (US, EU, Britain, China, Japan, India, Brazil & Canada) make up 75% of world economic activity. One way to construct an international equity portfolio would be to allocate 75% of it to these developed economies and spread the remaining 25% out over the emerging markets of the rest of the world. Emerging markets should have the potential to grow more than the developed world, but they also have a lot of risk built into their economies and currencies that could result in volatile performance in the short run. A conservative investor might want to only allocate, perhaps, 10% to the emerging markets and overweight their commitment to the developed world to the relative safety of the US.

Within the US, one could allocate to mid-cap and small-cap sectors to target growth without taking on the direct risk of investing internationally, in search of higher returns. Also, bear in mind that much of the profit realized by big US companies is the result of their business activities world-wide so even without investing in international equities, a portfolio of all big-name American companies (Think Boeing, Caterpillar, Johnson & Johnson) will already have a significant component of international exposure.

April 2017
April 2017
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April 2017