Pop quiz: What has done better recently, U.S.-stock funds, or foreign ones?
You might guess foreign -- and you would be wrong. Despite the upheaval in U.S. markets the past month or so, U.S.-stock mutual funds have actually held up better than their overseas counterparts.
But investors might want to consider whether this is an opportunity to shift more of their portfolios to overseas investments.
The risks of putting too much money abroad are obvious: Foreign markets can be opaque, or volatile, or both. Plus, currency swings can go against you. And in times of severe stress in the global markets -- like this summer -- there is still a tendency for investors to view the U.S. markets as a haven.
But the risk of too little money is that you don't benefit from diversity. In recent years, the correlations between U.S. and foreign markets have tightened, but "the markets are still not in sync," says Francis Kinniry, of the Vanguard Group.
How much is the right amount? A commonly cited statistic is that U.S. stocks comprise roughly 50 percent of the total value of the world's stock markets. But that doesn't mean investors should have a portfolio that's split 50-50.
Asset-allocation experts look at the question in terms of the amount of international holdings that provide the maximum amount of diversification without adding to the short-term risks. Vanguard's research says investors should have at least 20 percent of a stock portfolio invested internationally.
Others say the floor should be higher. AllianceBernstein Holding LP recommends clients have a minimum of 30 percent of a portfolio in non-U.S. stocks. "At that level, you have a portfolio with less risk and with modestly higher expected returns," says AllianceBernstein's Thomas Fontaine.
And it's important to diversify around the entire globe. The most recent downturn highlights how there can be big differences among non-U.S. countries. Funds heavily weighted in Asia held up better than those with big exposure to Europe, and, indeed, even better than many focused on the U.S. That's because the bond-market woes that started in the U.S. have had more significant ties to European companies than to those in the Far East.
For investors with little international-stock exposure, the next question is how to build the stake. That's where shorter-term considerations come into play.
Even for a long-term investment, it wouldn't make sense to pile into markets at their top. International stocks have had a great run the past few years; even with their recent setback, they aren't the steal that they were in late 2001 and early 2002.
Still, according to research from OppenheimerFunds, developed markets outside the United States still offer a 13 percent discount when compared on a price-to-earnings basis with the Standard & Poor's 500-stock index.
International markets "are still a little cheap on a long-term basis," says Kurt Wolfgrueber, chief investment officer at Oppenheimer.