18 Jun When a 401(k) offers no international investments

 Q. My 401(k) plan doesn’t offer any international investments, so I don’t have any in my portfolio. I’m 32. I know it’s important to be diverse in my investments. I can invest maybe $50 more per month. How do I choose the best international investment? And how do I decide if the money should be in an IRA or not?

A. International investments are an important part of any portfolio.

That’s because it will expose your savings to different areas of the market and give you diversification, which is vital for lowering overall risk and hopefully, increasing return.

Diversification is generally referred to as the only free lunch in investing, said Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown.

The concept dates back to the research of Harry Markowitz in the 1950s, Kazanchy said.

“His research identified that, by diversifying a portfolio among investments that have different patterns of return, investors can maximize their expected return for a given level of risk or minimize their risk for a given level of return,” Kazanchy said. “Markowitz received a share of the Nobel Prize for Economics in 1990 for his research and investors have been incorporating his teachings into practice for decades.”

Kazanchy said global diversification is a critical component of a well-designed stock portfolio because international stocks exhibit different patterns of return than U.S. stocks. In fact, he said, research by Vanguard shows that the optimal amount of international exposure for volatility-reducing benefits is in range of 25 to 40 percent of your equity portfolio.

If you only have $50 per month to invest internationally, Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, recommends a mutual fund.

“One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult — if not impossible — to create with a small amount of capital,” Meckler said.

Each shareholder participates proportionally in the gain or loss of the fund, he said.

“I’m not sure if anyone can advise you on the `best’ international investment,” he said. “There are established foreign countries as well as emerging markets. The emerging markets tend to be very volatile and the larger international countries tend to be more stable. It depends on your level of risk and your sleep factor.”

To pick a quality international fund, he recommends you consult with a financial advisor or pick a reputable mutual fund family and speak with one of their customer support personnel, he said.

Then you need to decide if you want to hold the investment in a taxable account or inside an IRA.

“You can participate in a deductible IRA even if you have a 401(k) plan at work, but there are income limitations,” Meckler said.

If you are single and earn below $61,000, the contribution is deductible. From $61,000 to $71,000, it phases out. If you are married the phase out limits are from $98,000 to $118,000.

For a Roth IRA, the single limits are $116,000 to $131,000 and for marrieds it’s $183,000 to $193,000, Meckler said.

Kazanchy recommends you select an international index fund that provides broad exposure to all developed and emerging international markets but excludes U.S. stocks.

“Whether you use and IRA or a taxable brokerage account will depend on your current tax situation,” he said. “However, when investing your new account, look into automatic investment plans or no transaction fee funds with a discount broker.”

Given the size of your monthly deposits, you will not want to have a significant portion of your capital spent on transaction fees, he said.

Finally, consider lobbying your employer to add an international fund or two. We’re sure you’re not the only employee who wants or needs foreign exposure.

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This story was first posted in June 2015.