Should You Increase Your International Exposure?

Rachel Haig: I'm Rachel Haig for Morningstar.com. Recently, a lot of investors have been turning abroad looking for growth opportunities. Here with me to discuss if this is a good idea for you is Morningstar's director of personal finance, Christine Benz. Thanks for joining me again, Christine.

Christine Benz: Rachel, nice to be here.

Haig: So in the past year, we've seen $80 billion pouring into emerging markets. Do you think there's still room for growth there, or is it a better idea for people to look elsewhere?

Benz: I think there's certainly still room for long-term growth. I would hate to sit here and have to argue the bear case for emerging markets over the long haul. I think most people recognize and understand that a lot of our global economy's growth is going to be driven by emerging markets. In the short term, though, I get a little nervous about the idea of investors adding new money to emerging markets. For one thing, when you look at the valuations in emerging markets, certainly according to Morningstar's equity analyst team, what you're seeing is that they think that most of the big emerging markets are fairly valued, if not overvalued, currently. So the contrarian in me would actually want to probably not add any new money to emerging markets.

And also, keep in mind that if you have, say, an active, broad, international fund run by a manager, he or she may have been adding to emerging markets for you. So you wouldn't want to layer on additional exposure without first checking what you have.

Haig: And in terms of deciding how much exposure you want, either to emerging markets or to more-developed international markets, what are things you should think about?

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Benz: It's a great question. One starting point, if you want to be completely agnostic about it, is to think that the U.S. is just about 40% of the total global stock market. Now I don't know a lot of investors who have that much staked in foreign stocks. So that would translate into a 60% foreign-stock weighting out of your overall equity weighting. That's a lot for a lot for U.S. investors. You can use an asset allocation tool to help you get in the right ballpark. Morningstar's is called  Asset Allocator. Or you could look to a target-date mutual fund, or a series of target-date mutual funds, to see how they are allocating their foreign stakes. When I look at the typical target-date fund in our database, what you see is foreign-stock weightings that are anywhere from 20% to 45% of their total equity allocation.

So that's kind of a ballpark that a lot of investors might find a good comfort level with.

Haig: And then another consideration when investing abroad is currency hedging, especially with concern about the dollar losing value against other currencies. What do you think investors should do about that? Anything? Or should they just hold steady?

Benz: Yeah, probably, I would urge not getting too cute in terms of trying to manage your currency allocation, because you really have to keep in mind the myriad of factors that you're trying to forecast when you are forecasting and making bets on interest rates. So you're thinking about the growth of the U.S. economy, the direction of interest rates. But also, you're thinking about those factors for all these other global markets as well. So it's a tall order for the typical investor, or for any investor, for that matter.

My advice would be, if you do have some bonds in your portfolio, making sure that you have some non-dollar exposure in that bond piece. And certainly, if you have foreign stock holdings, making sure that you have some un-hedged foreign stock holdings.

And these days, most foreign stock mutual funds are un-hedged. So you're getting a helping of currency exposure right there, by having those more plain vanilla asset classes. Probably no need to dabble in individual currency ETFs or mutual funds.

Haig: That makes sense. Thanks for joining me again.

Benz: Thanks, Rachel. Nice being here.

Haig: For Morningstar.com, I'm Rachel Haig. Thanks for watching.