Should investors limit their international investments to equities and bonds, or should they include currencies and international real estate?
Based on the target-date funds recommended by mutual fund families, prudent portfolios must have international stocks. International real estate also makes a lot of sense and is an often-overlooked asset class. T. Rowe Price recommends an exposure to international bonds, but Vanguard and Fidelity do not, and no one recommends currencies. Also worth noting: No one recommends hedge funds or commodities.
The traditional argument, when government debt was default-risk free, is: If you buy, for example, Japanese bonds and hedge the currency risk, then you are right back to owning U.S. Treasury bonds. I believe this explains the few recommendations for international bonds or currency bets. Since default risk exists on some governments’ debt, the case for international bond diversification may be increasing.
- Professor’s Profile:
William Reichenstein, CFA, Ph.D.
- Pat and Thomas R. Powers Chair in Investment Management