Advisor Debra Morrison of Empowered Retirement, Inc. likes to explain things by analogy, so that people are willing to talk about the process of investing —something she says doesn’t happen “unless you break it down.”
And she explains the international components in a portfolio that way, too—components that are necessary because “we are in a global environment. When we limit our horizon to that which we can perhaps physically touch or see,” she said, “we are potentially limiting the return.” And since the U.S. is only a part, and not the largest part, of that global environment, there’s plenty of room for investments in other countries.
Conjuring up the image of a chocolate cake, Morrison pointed out that the recipe calls for some flour and some baking soda. And, just as the cake will have more flour than baking soda, portfolios are over weighted in U.S. investments. But you “have to have some baking soda—frontier or emerging markets” or else you have no cake.
Having done international investing for 37 years “you went to Mark Mobius at Templeton and went to the Tweedy Brown Fund and Helen Young Hayes, who was investing in Pacific Rim countries—active money managers because you knew the managers and strategies,” Morrison said. It’s a lot easier now than then, when it wasn’t so easy to get information on possible investments, she said.
That’s not all that’s easier; these days her firm sticks to passive investments and indexes, and brings in “international investments via institutional no-load Dimensional Fund Advisors’ mutual funds, in a percentage that better reflects the GDP of individual countries relative to the world’s total.” The same goes for bonds, which she uses in the form of “global bond funds—and we keep our maturities very, very short. I did used to buy individual bonds,” she said, “yet most of them were U.S. I don’t know enough, and don’t know whether most people know enough [to buy individual countries’ bonds directly]. I prefer institutional and no-load.”
So how much of the portfolio actually goes into international? Around 40%, said Morrison, is the recommendation for most clients, although the client does have a choice and some are not comfortable with that much outside the U.S.—particularly since many among her clients are older and more conservative. However, Morrison pointed out that “the U.S. is less than half the world market cap and shrinking; 70% of world GDP is generated outside the U.S., and you’ve got to have money in those markets.” In fact, the U.S. finished 2014 as 22nd out of 44 countries, based on its 10-year performance.