Vista held our 13th annual Investment Symposium last month. During this all-day event, members of our investment and financial planning teams presented research projects to our full advisory staff, allowing us to explore topics we believe will help us better serve our clients.

As in years past, we welcomed two outside guests to our Symposium. Dimensional Fund Advisor’s Global Head of Fixed Income gave us an insider’s view of DFA’s global trading desk, while a principal in Vanguard’s Investment Strategy Group joined us to discuss the latest data on indexing (it still beats active!) and the mutual fund giant’s take on the future of investment advice.

Other topics on this year’s agenda included:

  • Best Practices for the Asset Allocation Decision
  • A Better Investment Policy Statement
  • Can We Streamline and Improve Our Portfolios?
  • International Stocks: What is the Right Amount?

While you can expect to hear more from us on these topics, we’d like to highlight takeaways from two of our discussions.

Best Practices for the Asset Allocation Decision

Determining a long-term, strategic asset allocation based on an investor’s unique circumstances is essential to effective investing. This mix of stocks, real estate, bonds, and cash will determine the investor’s experience and, ultimately, success or failure.

No discussion of asset allocation, however, can begin without first acknowledging this reality: there may be no one precise portfolio mix that is best for any one investor. The “right” allocation is one that has a high probability of meeting the investor’s goals and can be adhered to in the best and worst of times.

To determine a client’s asset allocation, we consider a series of tradeoffs between interrelated factors that can be boiled down to:

  1. How long you work
  2. How much you save
  3. How much you plan to spend
  4. How you invest (asset allocation)

Utilizing our in-house modeling tools to test these factors in real time, it quickly becomes apparent we can’t change one input without impacting the other(s). For example, seeking to minimize portfolio volatility or the magnitude of losses in down years often requires living on less throughout retirement and/or leaving less to heirs or charity for a plan to be successful. Analyzing these tradeoffs simultaneously, however, ensures we make the asset allocation decision in the most comprehensive manner possible.

In doing so, we help our clients determine an asset allocation that is just right for them.

International Stocks: What is the Right Amount?

It’s a question we hear often: what is the right amount of international stocks to hold in a portfolio?

Today, international stocks make up about 50% of total global market capitalization. Recent data, however, shows U.S. investors hold just 20% of their stock portfolios in international shares.

And, if you were to ask investors how much they wish they held? The answer would likely be 0%, given the dramatic performance advantage U.S. stocks have enjoyed over the past decade.

So, when considering how much to invest internationally, what is the right amount?

To answer this, we start by remembering that U.S. and international stocks have similar expected returns—both represent equity ownership in businesses domestically and around the globe. While inevitable periods of relatively disappointing performance may cause investors to question why they own any international or U.S. stocks, we know that each should play a role in a long-term portfolio.

When considering how much of a stock portfolio to devote to international shares, we first turn to market capitalization as a guide. This is the value investors around the world have collectively placed on stocks, and today international stocks represent 48% of all publicly traded global shares.

We do recognize there are extra risks to investing in international markets. Trading costs and fund management fees tend to be higher than U.S. investments. Most of our international investments, for example, are held in local currencies and not hedged against the U.S. dollar. This introduces currency risk, which can help or hurt returns in the short run, but certainly contributes to international stocks’ higher volatility.

As a result, we’ve long allocated 33% of stock portfolios to international shares—fewer than the global market cap would suggest, but more than most U.S. investors—to account for additional costs and risks, but with a twist. We favor small company and value stocks in developed international markets and a healthy dose of each in emerging markets. This targeted approach seeks to do even more with less—better diversification and higher expected returns.

Our latest research continues to support our 33% allocation of stock portfolios to international investments. While recent performance might influence investors otherwise, we know that our clients will ultimately benefit from a sensible, disciplined approach through the ebbs and flows of global stock performance.

As such, a healthy allocation to international stocks continues to be an important part of our clients’ stock portfolios.