taylor larimore why 20 percent international

In the ever-evolving landscape of investment strategies, Taylor Larimore’s insights into the importance of maintaining a 20 percent allocation to international investments stand out. This philosophy not only reflects a balanced approach to diversifying one's portfolio but also addresses the complexities of global economics. In this article, we will delve deeply into Larimore's rationale, the benefits of international investing, and practical tips for incorporating this strategy into your investment portfolio.

Understanding Taylor Larimore's Investment Philosophy

Taylor Larimore, often referred to as one of the founders of the Boglehead investing philosophy, emphasizes a simple, low-cost, and diversified approach to investing. His strategies are rooted in the principles laid out by John Bogle, the founder of Vanguard Group. Larimore advocates for a balanced portfolio that not only includes domestic investments but also allocates a significant portion to international markets.

The Rationale Behind 20 Percent International Allocation

Larimore's suggestion to keep 20 percent of one's investment portfolio in international stocks is based on several key factors:

Diversification: Investing in international markets provides diversification benefits. Different countries and regions often experience economic cycles at different times. By spreading investments across borders, investors can mitigate risk and potentially enhance returns.
Global Growth Opportunities: Emerging markets, in particular, present significant growth potential. Countries like India, China, and Brazil have rapidly growing economies that can offer higher returns than mature markets.
Currency Diversification: Holding international assets can provide a hedge against domestic currency fluctuations. When the U.S. dollar weakens, international investments may perform better in dollar terms, helping to protect your portfolio’s value.

The Benefits of International Investing

Investing in international markets can offer several advantages, which Larimore highlights in his investment philosophy:

1. Enhanced Portfolio Returns

Historically, international markets have outperformed domestic markets over long periods. By allocating 20 percent of your portfolio to international investments, you position yourself to capitalize on these potential gains. For instance, according to a study by MSCI, international equities have outperformed U.S. equities in various time frames, underscoring the importance of global diversification.

2. Risk Management

Investing exclusively in U.S. markets exposes investors to specific risks, including economic downturns, political instability, and market volatility. By incorporating international investments, you can reduce the overall risk of your portfolio. During periods of U.S. market downturns, international markets may remain stable or even thrive, providing a buffer for your investments.

3. Exposure to Different Economic Cycles

Different countries and regions often experience varying economic cycles. By investing internationally, you gain exposure to these cycles, which can lead to greater investment opportunities. For example, while the U.S. economy may be in a recession, other countries may be experiencing growth, allowing for potential gains in those markets.

How to Implement a 20 Percent International Allocation

Implementing a 20 percent allocation to international investments can be straightforward. Here are practical steps to help you achieve this allocation:

1. Assess Your Current Portfolio

The first step is to analyze your current portfolio to determine your existing allocation to international investments. This will help you understand how much more you need to invest internationally to reach the 20 percent target.

2. Choose the Right Investment Vehicles

There are various ways to invest internationally, including:

International Mutual Funds: These funds pool money from multiple investors to invest in a diversified portfolio of international stocks. Look for low-cost index funds that track international indices.
Exchange-Traded Funds (ETFs): Similar to mutual funds, ETFs can provide exposure to international markets. They trade on stock exchanges and often have lower fees than mutual funds.
Direct Stock Purchases: For the more adventurous investor, buying stocks of international companies directly can provide exposure, albeit with higher risk and management requirements.

3. Monitor and Rebalance Regularly

Investment allocations can shift over time due to market fluctuations. Regularly review your portfolio to ensure your international allocation remains at 20 percent. Rebalancing may involve selling some domestic assets and purchasing international assets to maintain your desired allocation.

Common Misconceptions About International Investing

Despite the benefits, many investors harbor misconceptions about international investing that can deter them from maintaining a 20 percent allocation:

1. International Investing is Too Risky

While it’s true that international markets can be volatile, risk can be managed through diversification and careful selection of investments. Many international funds have built-in diversification across various countries and sectors, which can help mitigate risks.

2. U.S. Markets are Always Safer

While the U.S. markets are often seen as stable, they are not immune to downturns. Economic issues, such as the financial crisis of 2008, demonstrated that even the most robust economies can falter. International investments can provide a safeguard against domestic market fluctuations.

3. International Investments are Too Complicated

With the rise of index funds and ETFs, investing internationally has become much simpler. Investors can now achieve international exposure without the need for extensive research into foreign markets.

Conclusion: Embracing the Global Market

In conclusion, Taylor Larimore’s recommendation to allocate 20 percent of your investment portfolio to international markets is a sound strategy for long-term financial health. By diversifying your investments, you can enhance returns, manage risks, and gain exposure to different economic cycles. As the world becomes increasingly interconnected, understanding and participating in global markets is more important than ever.

Are you ready to embrace international investing? Start by evaluating your portfolio today and consider incorporating a 20 percent international allocation. Whether you choose mutual funds, ETFs, or direct stock purchases, take the first step toward a more diversified investment strategy.

For more insights on investing and portfolio management, check out resources from Bogleheads and Investopedia.