Investing in international stocks and bonds has become par for the course among those seeking to get the best out of the markets for their retirement. An exposure to foreign investments is key for anyone who wants to make sure they have a well diversified retirement portfolio, advisors say, and even in light of the recent decline in emerging markets assets, individuals–particularly those in their 30s and 40s–would be well served by having a sleeve of their portfolio invested in these instruments.
“If you accept the idea that the effective construction of long-term portfolios requires a collection of poorly correlated assets, then it is necessary to include foreign equities,” says Raymond Benton, CFP at Denver-based Lincoln Financial Advisors. “Foreign bond funds also may add an additional element of diversification to a well balanced bond portfolio, and unhedged funds offer direct exposure to currency risk as well as high yield opportunities.”
According to Morningstar data ending May 31, 2005, international equity funds in the U.S. far outpaced the S&P 500 for the preceding three-year period, while 98.4% of these funds outperformed the benchmark over the prior five years.
“You could have owned the worst of the 1,145 foreign funds and had a better return than the average U.S. stock fund,” says Matthew Chope, a CFP in Southfield, Minnesota.
That said, Chope also points out that such a run cannot last forever, particularly with respect to emerging markets assets. “We are in the late innings of the performance of emerging market equities versus domestic companies, but even if this is perceived as a riskier asset class, it should still figure as a component of a retirement portfolio,” he says.