NEW YORK (TheStreet) Americans are increasingly investing in foreign stocks, and millennials are leading the way.
The generation born from 1980 to 2000, whose estimated population of 92 million makes it the biggest in U.S. history, consistently invested more in international stocks than any other age group from 2005 to 2011, according to a new study by the National Bureau of Economic Research. The gains occurred despite rising appetites overall for foreign investments.
"Younger cohorts [are] investing more internationally than older ones, and each cohort [is] investing more internationally over time," says the June-dated report titled, "Who is Internationally Diversified."
Older people are consistently less internationally diversified than younger ones, according to the report. Millennials held almost one-fourth of their equity holdings in non-U.S. stocks by the end of 2011, based on analysis of investments by 3.8 million individuals in 401(k) retirement plans. That was higher than any of the other age groups studied, with the oldest, those born before 1950, holding less than 15% by the end of 2011.
In addition, the study found that all age groups saw a steady increase in the allocation toward non-U.S. stocks over the past few years.
The authors of the study do caution that investments in 401(k) plans may not be the whole story for everyone.
"Because we only have data on the 401(k) allocations, which for many individuals may not represent their full investment portfolio, it is conceivable that some people under- invest in international equity in their 401(k) plan, but have international allocations elsewhere," the report says.
Still, the only investments many people have are in their 401(k) plans, and the trends do in some ways reflect the changing state of the world.
"These young investors have grown up in a period of funds and ETFs, and everything is just a point and click away," says Jack Ablin, chief investment officer at BMO Private Bank in Chicago. "Older investors had to jump through several hoops to do so."
But it's more than just technology and information flow: Investing opportunities have also changed.
"Three-quarters of the world's GDP and three-quarters of the world's listed companies are outside the U.S." says Tim Cohen, chief investment officer for international equities at Fidelity.
As the U.S. markets have rallied since the financial crisis, there may be more opportunity overseas, he continues. That's because overseas markets may offer better value than those at home, given the tremendous rally in the U.S. indices since the financial crisis.
Another big reason to invest in non-U.S. stocks is to reduce overall volatility in a portfolio.Since overseas markets don't always move in lockstep with U.S. markets, overall changes in the value of a portfolio tend to be lower.
So if you want to take the plunge, how much should you invest?
Cohen says an ideal allocation would be about 30% of the equity portion of a portfolio. That would still leave you with 70% of the stock portion in U.S. equities.
Investors should remember to rebalance their portfolio once a year, he added. If you had a 30% allocation five years ago and haven't rebalanced it, then your foreign stock allocation will now have a lower percentage, given the outperformance of U.S. stocks over that period, he explains.
Those who do decide to move a portion of their money overseas should remember that there are risks.
"I would worry more about investing abroad for the reasons of transparency of markets and the way financial information flows," says Peter Rodriguez, professor of business at the Darden Graduate School of Business Administration in Charlottesville, Va. "Take a look at the Chinese market; there are an awful lot of casino aspects."
One way around the risks is to put your money in the hands of professional investors who can take time to scope out each stock carefully. For most people, that means mutual funds: There are plenty of highly rated mutual funds that specialize in non-U.S. stocks, including Hartford International Value ( (HILTX)), Lazard International Strategic Equities Open ( (LISOX)), and MFS International Value R5 (MINJX), all of which hold five-star ratings from Morningstar.