Adding foreign stocks to a domestic portfolio can reduce overall volatility. According to Barclays Global Investors, San Francisco, the optimal risk reduction, based on results for the past five years, would be 60 percent U.S. stocks and 40 percent foreign stocks. If you exclude Canadian and emerging markets stocks, a ratio of 70-30 would have provided the smoothest path.
Using 10-year results, the optimal risk reduction would have come with a 40 percent llocation to U.S. stocks and a 60 percent allocation to stocks all around the world. Excluding Canada and the emerging markets, a 50-50 split would have produced the least volatility.
Investors who add foreign stocks to their portfolio not only can reduce risk, they also might enhance returns by gaining access to additional excellent companies. According to Morgan Stanley Capital International, U.S. stocks account for 54 percent of the world’s market capitalization. Outside the U.S. are some outstanding companies. Non-U.S. stocks have underperformed substantially in recent years but even a modest catch-up would lead to large relative gains.
