Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence

29 Pages Posted: 29 Aug 2013

See all articles by Gary Burtless

Gary Burtless

Brookings Institution; Boston College - Retirement Research Center

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

A crucial decision facing retirement savers is how to allocate their savings across broad investment classes, including the choice of how to divide investments between domestic and foreign holdings. This study investigates whether cross-border investing would have been advantageous to U.S. retirement savers in the past. The analysis is based on empirical evidence on asset returns in eight industrialized countries that have reliable historical time series data on stock and government bond returns. The goal is to determine whether U.S. workers would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds without hedging the currency risks of their overseas investments. The results show that workers could indeed have increased their expected pensions if they included unhedged foreign assets in their portfolio and if the portfolio were selected from one on the efficient frontier. Under many naïve investing strategies, however, increasing workers’ allocation to overseas assets will not reduce the risk of catastrophically poor investment performance. The tabulations show that the risk of obtaining a very low pension replacement rate actually increases if workers allocate a size-able percentage of their savings to overseas investments.

Suggested Citation

Burtless, Gary T, Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence (October 2006). Available at SSRN: https://ssrn.com/abstract=2316957 or http://dx.doi.org/10.2139/ssrn.2316957

Gary T Burtless (Contact Author)

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