Worried about U.S. politics? How to protect your portfolio

@Money April 6, 2012: 12:59 PM ET

(MONEY Magazine) -- I'm worried that our incompetent politicians will screw up the current bull market and cause even worse economic damage than we've seen in Europe. So I'm thinking of getting out of U.S. stocks and going 100% into international shares. Is this a good idea? -- M.B., San Antonio, Texas

Let me get this straight.

To protect yourself from the chance that American politicians might make a hash of things, you plan to put all your money into international stocks, even though foreign politicians have already shown they're more than capable of wreaking the very kind of havoc you fear?

Sorry, but this is a terrible idea.

It's not that I doubt political decisions can affect financial markets. Clearly decisions about taxes, government spending and monetary policy can have a significant impact on economic growth and market performance.

And I certainly don't hold U.S. politicians in especially high regard when it comes to their handling of economic matters. At the same time, though, I don't see any reason to assume that home-grown politicos are more likely to exercise poor judgment in the economic sphere than their counterparts abroad."

So your plan to pull out of the world's single largest stock market because you think American pols will screw up more than foreign ones strikes me as a flimsy investing premise at best.

I have a better idea. Do what prudent investors usually do when facing uncertainty: Spread your money around, in this case by holding both U.S. and international shares.

Reasonable people can disagree about how much of each you should own, but advisors typically recommend devoting anywhere from 10% to 30% of your stock stash to foreign shares. You can do more if you like. But research shows that going beyond 30% doesn't appreciably improve performance.

Best money moves in your 40s and 50s

Whatever percentage you decide on, you can get all the foreign exposure you need by going to our MONEY 70 list of recommended funds. There, you can create a diversified portfolio of foreign shares by assembling different funds or ETFs that focus on particular market segments -- developed countries, emerging markets, large shares, small, etc.

Or, you can simply invest in a total international stock fund (VGTSX) or ETF (VXUS), which has large and small shares from virtually every country and region in one fund.

If you want to make things really easy on yourself, you could buy a world stock market index fund (VTWSX) or ETF (VT). This will give you the entire global stock market -- the U.S., Europe, Japan, China, emerging markets -- in a single portfolio.

One caveat: A world index fund divvies up its holdings based on the percentage of global stock market values each country represents. And since the U.S. accounts for about 45% of total stock values around the world, holding only a world stock market index fund would mean upwards of 55% of your money sits in foreign shares. I consider that rather high, although still preferable to going 100% international.

There is another option: Vary your exposure to specific foreign markets based on how you think each is likely to perform in the coming year or so. If you go this route, however, you can't expect to succeed just by making judgments about the quality of each country's politicians. You've got to do some real analysis, like digging into each nation's growth prospects, gauging the outlook for its currency, deciding whether its stock market is reasonably priced, etc.

Ask The Help Desk about investing abroad

Frankly, I doubt that most individual investors have the time, inclination or expertise to pull this off. If you want to try, though, there are more than enough single-country and regional funds and ETFs available to create an international portfolio that reflects your reading of the global markets.

But whatever you do, don't shift all your dough out of domestic shares and into foreign ones. That's the kind of move I'd expect from an incompetent politician, not an investor.

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