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The New 60/40 Portfolio: Domestic/International

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Rob Schmansky of Clear Financial Advisors, LLC, is a big believer in international diversification in client portfolios—so much so that the typical split he uses is 60/40–60 U.S. and 40 international.

“When you look at a breakdown of investable financial markets [and] the global economy,” said Schmansky, “what you see is that the U.S. isn’t the largest majority anymore.” He said that the more investable assets included in a portfolio in ways that make sense—which includes looking outside the U.S. for opportunities—“the smoother the ride is going to be.”

Schmansky, who has been relying on injections of international exposure throughout his career—but more so now that he’s at the helm of his own firm—points out that “funds always have some sort of international exposure. For myself, I’ve ratcheted it up a little bit.” One area where he’s had success is in real estate, playing off international holdings against domestic in a way that “worked out very nicely,” particularly during the last couple of years.

He pointed to Vanguard’s domestic REIT fund and its global ex-U.S. real estate fund as examples that have demonstrated the value of holding international assets. “If you compare [the two] by side, their performance over the last five years or so, one [year one is] performing strongly over the other, but in the next year that reverses itself. By holding both assets, you engage in a discipline. You capitalize on selling at the top of the domestic market while purchasing international [when it’s low.]”

Making the case for diversification, Schmansky takes a historic view. “The U.S. won’t necessarily be the best [investment] over the next hundred years. If you look back over history and see tension in the financial centers of the world, where the world does business, what its reserve currencies have been, how many have we had over the last 500 years?” Diversification looks toward the future—a future that might not necessarily see the U.S. on top.

He said that retirees aren’t necessarily convinced of the wisdom of international diversification. “But at the same time,” he said, “they’re relying very heavily on income streams that are dollar-based: Social Security, savings accounts, etc. are all part of their portfolio mix.” By injecting international elements into their portfolio, it helps to balance out the U.S. financial assets and make sure their income stream isn’t making the whole portfolio overweighted.

Schmansky relies primarily on mutual funds, which he says offer benefits over ETFs because they have a “known price. ETFs go for long stretches in which they’re trading at significant discounts.” That’s not necessarily a bad thing, he concedes, and he does use ETFs that he says “provide index exposure that it’s difficult to get in mutual funds right now.”

He doesn’t necessarily favor one country or region over another, but when it comes to bonds, “if you hear about [certain countries] in the news, you probably don’t want to invest in their debt.” Most “newsworthy” currently, and on his list to avoid? Argentina, Brazil and Greece.

While he says that it makes sense to keep a home country bias in fixed income, since the U.S. has been the most stable and “retirees want to know how much they will have to spend,” he still believes international bond diversification is appropriate, since other countries are at different points in their economies and interest cycles than the U.S. Just “stay away from the ones that don’t pay their bills.”

Schmansky also believes that diversifying internationally is important for younger investors, whose “future ability to earn is fantastic…. If you’re young and have plenty of time ahead of you, you want to diversify. If you look back over the last hundred-plus years and even before that, you’ll see a lot of change—and there will be a lot going forward.” That’s the strongest case, he says, for diversifying assets.