Many financial advisors prefer foreign stocks because they have different risk and return characteristics than U.S. equities. That can diversify a portfolio and prevent "home bias," the tendency investors have to invest heavily in the stocks of their own country.
So how much exposure should investors have to global markets? The U.S. had about 36 percent of the world's market capitalization as of March 2015, according to Bespoke Investment Group. (China had about 9.4 percent.) That means a portfolio focused solely on U.S. stocks would exclude more than 60 percent of the equity opportunities available worldwide.
"Because my clients are in the U.S. and spending dollars, and also a bit for psychological comfort, I skew the allocation somewhat more toward U.S. equities than the strict market valuations would indicate," said Charles Levin, a certified financial planner in Wayland, Massachusetts. He recommends investors put 60 percent of the equity portion of their portfolios in U.S. stocks and 40 percent in international stocks.
U.S. mutual fund investors held, on average, only 27 percent of their total equity allocation in non-U.S. funds as of December 2013, according to an analysis by The Vanguard Group.
Vanguard found that a 20 percent allocation to international stocks is a good starting point for most investors. However, the additional expense of investing in international stocks can be a drag on returns. Though global markets have become more efficient, costs—such as expense ratios for international stock funds and bid-ask spreads—are usually higher for U.S.investors.
"[I]nternational allocations exceeding 40 percent have not historically added significant additional diversification benefits, particularly accounting for costs. For many investors, an allocation between 20 percent and 40 percent should be considered reasonable," Vanguard researchers concluded.