Risk and reward of international investing for U.S. retirement saversHistorical evidence

Risk and reward of international investing for U.S. retirement savers

Historical evidence

Burtless

Gary

Burtless, Gary

Author

text

working paper

Chestnut Hill, Mass. Center for Retirement Research at Boston College20062006monographic

Chestnut Hill, Mass.

Center for Retirement Research at Boston College

2006

monographic

Englisheng

English

eng

electronicapplication/pdfborn digital

electronic

application/pdf

born digital

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 nave 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.

Gary Burtless.

CRR WP2006-25

CRR WP

2006-25

http://crr.bc.edu/images/stories/Working_Papers/wp_2006-25.pdf

MChBEnglisheng

MChB

Englisheng

English

eng