Investing in international stocks and bonds has increasingly become par for the course among those seeking to get the best out of the markets for their retirement. Indeed, an exposure to foreign investments is key for anyone who wants to make sure they have a well diversified retirement portfolio, advisors say, and even in light of the recent decline in emerging markets assets (which have yielded superior returns over the past year), individuals–particularly those in their 30s and 40s–would be well served by having a sleeve of their portfolio invested in these instruments.
"If you accept the idea that the effective construction of long-term portfolios requires a collection of poorly correlated assets, then it is necessary to include foreign equities," says Raymond Benton, CFP at Denver, Co.-based Lincoln Financial Advisors. "Foreign bond funds also may add an additional element of diversification to a well balanced bond portfolio, and unhedged funds offer direct exposure to currency risk as well as high yield opportunities."
According to Morningstar data ending May 31, 2005, international equity funds in the U.S. by far outpaced the S&P 500 for the preceding three-year period, while 98.4% of these funds outperformed the benchmark over the prior five years.
"You could have owned the worst of the 1,145 foreign funds and had a better return than the measurement used for average U.S. stock funds," says Matthew Chope, a CFP in Southfield, Minnesota.
That said, Chope also points out that such a run cannot last forever, particularly with respect to emerging markets assets. "We are in the late innings of the performance of emerging market equities versus domestic companies, but even if this is perceived as a riskier asset class, it should still figure as a component of a retirement portfolio," he says.
Why so?
Simply put, emerging markets offer a great deal of growth potential in the long-term as globalization continues, Benton says. Most countries on the path to becoming full-fledged market economies have adopted much more effective macro-fiscal policies, including inflation targeting regimes, flexible exchange rate regimes and more prudent fiscal regimes, and this has strengthened their positions immensely and made them more attractive as investment targets for foreign investors.
