Question: I’ve got two questions. First, I’ve often heard the advice that individuals shouldn’t invest much in their employer, as they risk losing their job and their investment simultaneously should the company go under. I currently work for the federal government. Should I be concerned about holding government securities, that is, more concerned than the average investor?
Second, I’m in my early/mid thirties, so I’ve got a longish horizon for my retirement portfolio. Personally, and not speaking in any way as a government employee, I’ve got concerns about the US economy over the long term. (Not to be alarmist, but all empires fall eventually.) All the articles I could find about international diversification only recommend about 20% of one’s portfolio be non-US stock, which seems way too small to me. I realize that many American companies have significant presence overseas, but it still feels like I’m putting too many eggs in the US basket. And when I look at most of the international investments, they’re focused on Europe, which doesn’t seem that different either. I feel like I should have more money in emerging markets, but am I just caught up in the media reports lauding China, India, and Brazil? Thanks! Gretchen, Washington, DC
Answer: On your first question, U.S. Treasuries should remain the bedrock investment for the safe portion of your long-term portfolio. Even though you’re a government employee you don’t need to be more concerned than the average investor, although you so share the concern about the full faith and credit of the federal government as an average citizen. The risk with owning the stock of a company you work at is it goes out of business. Despite all the current hyperbole, the U.S. government isn’t broke. Period.
Your second question is more difficult. I agree with your sentiment about the growth prospects of emerging markets, but I’m skeptical of putting too large portion of your retirement at risk to the fortunes of the emerging markets.
Every once in a great while a trend takes hold that’s so powerful it transforms the global economy: the Industrial Revolution of the 18th century, mass production in the 19th century, and the emergence of cheap computing and communications in the 20th century. The newest megatrend is the rise of the emerging markets, such as India, China, Brazil, Vietnam, Chile, Indonesia, Malaysia, and South Africa. They offer the investor growth.
Nevertheless, these economies will remain volatile. For instance, speculative capital has poured over the years into China. A number of prominent investors fear the combination of a speculative frenzy and a backward banking system will eventual burst the bubble. The Chinese government is also trying to cool off an over-heated economy, always a risky task.
The average U.S. portfolio is exposed 11% to 12% internationally (both developed and emerging markets). Over the past decade, financial planners have suggested raising it to as much as 30%, at least for their wealthier clients. But that percentage includes both developed and emerging markets.
However, there’s nothing wrong by definition with putting an extra bet on emerging markets. It gets to all those basic questions about your appetite for risk and the volatility of your earnings.
For example, the steadier your income and the greater your job security the more risk you can afford to take with an investment portfolio. Similarly, the more uncertain your income and the greater your job insecurity the less risk you should trake with a portfolio. This is just one important issue to think through in deciding on how much to allocate to emerging markets.
If you do decide to take a larger stake in emerging markets, I would still recommend sticking with broadly diversified international and emerging market portfolios rather than making a concentrated bet on an emerging market or two, like China and India.
A simple way to check in on a smart approach toward constructing a retirement portfolio–including international investments–is The Elements of Investing by Burton Malkiel and Charles Ellis.
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