Most of us have heard the advice that we need to employ diversification within our broader investment portfolios. This includes diversification of asset classes, but also within classes. One of these classes is stocks.
Within each of our stock portfolios, many of us tend to have a home country bias when investing. As we discussed in a previous article, we can alleviate this by purchasing international stock funds to diversify our risk exposure.
However, we have to ask: Just how much diversification are we really getting when we invest internationally?
- Some stock markets around the world track the U.S. relatively closely
- Some international stock funds are very geographically concentrated.
In terms of tracking the U.S. closely, non-North American markets rate as follows:
- India: Least like the U.S.
- Russia: Least like the U.S.
- Japan: Least like the U.S.
- East Asia: Somewhat like the U.S.
- Latin America: Somewhat like the U.S.
- Europe: Most like the U.S.
Interestingly, taking that into account, here are the average holdings by region in large cap foreign funds:
- Europe: 61%
- Japan: 15%
- Latin America: 3.7%
- Asia (excluding Japan): 3.2%
- India: 1.1%
- Russia: 0.6%
Connecting the dots, Europe correlates highest with the U.S., and represents a significant percentage of large international funds.
The article lists its own lessons. For me personally, I think the biggest takeaway is to revisit the composition of my international exposure to stocks.
I do have an individual fund in which I’m currently invested, but I haven’t checked the makeup of this fund. My previous efforts in evaluating funds focused primarily on historical performance, not it’s specific investments and source countries.
Clearly, I should take a closer look at this.
Are you have investments in international stock funds? If so, have you researched the holdings of the funds – such as geographic concentration, size of the companies, etc?