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By Christine Benz | 10-15-2015 12:00 AM

Getting Your Global Allocation Right

Creating a portfolio with country weightings more in line with the global market cap is a good starting point for overcoming 'home-country bias,' says Vanguard's Fran Kinniry.

Christine Benz: Hi, I'm Christine Benz for Many investors wrestle with how much to allocate to foreign stocks and bonds. I recently sat down with Vanguard's Fran Kinniry, who shared some guidance on setting those allocations.

Fran, thank you so much for being here.

Fran Kinniry: Thank you, Christine.

Benz: You have done a lot of work on the topic of global investing and how globally diversified portfolios should be. Let's start by discussing the case for having a globally diversified portfolio.

Kinniry: Sure. I think most investors have what is known as a "home bias," which means they tend to overweight their home country, and this is not just a U.S. phenomenon. It actually happens in every market that we see, and that is to overown your home country. There is risk to that because you can actually get what we would call "free diversification" by owning something closer to the global cap weight. Now, there could always be some slight home bias, but you really want to be aware of how large that home bias is because you're going to get equitylike returns, you're going to lower the standard deviation and risk, and get more securities. So, for all of those reasons, it makes sense to be aware of where global capitalizations lie and be close to that and try to remove as much of the home bias as you can.

Benz: So, for a U.S. investor, the U.S. market is, give or take, roughly 50% of the global equity market today, and foreign stocks compose the other half.

Kinniry: That's correct. The global cap would be 50-50. Vanguard, in most of our solutions, we recommend 40% non-U.S. and 60% U.S. So, we're close to the global cap in the U.S., but there are reasons why you might want to have a slight home bias: You're going to spend money in your own inflation, and there's an element of investor comfort with having a small home bias. So, a 10% home bias here in the U.S., for us, is pretty marginal. If we can get investors to be at that global level, we think that that's the optimal spot to be.

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