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

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Author Info

  • Gary Burtless

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 sizeable percentage of their savings to overseas investments.

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File URL: http://crr.bc.edu/working-papers/risk-and-reward-of-international-investing-for-us-retirement-savers-historical-evidence/
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Bibliographic Info

Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2006-25.

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Length: 25 pages
Date of creation: Dec 2006
Date of revision: Dec 2006
Handle: RePEc:crr:crrwps:wp2006-25

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Keywords: investing; foreign holdings; cross-border; overseas; risk; reward; shortfalls; retirement;

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References

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  1. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, . "The Role of Real Annuities and Indexed Bonds In An Individual Accounts Retirement Program," Pension Research Council Working Papers, Wharton School Pension Research Council, University of Pennsylvania 99-2, Wharton School Pension Research Council, University of Pennsylvania.
  2. Campbell, Rachel A. & Kraussl, Roman, 2007. "Revisiting the home bias puzzle: Downside equity risk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(7), pages 1239-1260, November.
  3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 19(3), pages 425-442, 09.
  4. Canner, Niko & Mankiw, N Gregory & Weil, David N, 1997. "An Asset Allocation Puzzle," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 181-91, March.
  5. Gary Burtless, 2000. "Social Security Privatization and Financial Market Risk: Lessons from U.S. Financial History," Discussion Papers of DIW Berlin 211, DIW Berlin, German Institute for Economic Research.
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Cited by:
  1. Fahad Rehman, 2010. "Asset Allocation for Government Pension Funds in Pakistan: A Case for International Diversification," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, Department of Economics, The Lahore School of Economics, vol. 15(1), pages 127-151, Jan-Jun.
  2. Rehman, Fahd, 2010. "Asset Allocation for Government Pension Funds in Pakistan:A Case for International Diversification," MPRA Paper 25060, University Library of Munich, Germany.

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