Sizing Up Global Market Returns

But the Dow and the S&P are outdated benchmarks, says Lance Alston, certified financial planner and president of JWA Financial Group in Dallas. Investors measuring their portfolio's performance against that of the domestic behemoths are not fully accounting for the available opportunities. A diversified portfolio should reflect the global market, not just American blue chips, says Alston.

Too many investors are not diversified enough, according to the planner. In an effort to rectify that — at least for its clients — his firm created the Market Return Benchmark. The average includes some 7,000 stocks drawn from among U.S. large caps (40%), small caps (20%), real estate investment trusts (10%), international large caps (10%), international small caps (10%) and emerging market stocks (10%).

The Market Return Benchmark is a performance yardstick, nothing more. "These percentage allocation targets don't change because of market conditions or economic conditions or anything else like that," Alston says.

But it's also meant to open investors' eyes to the opportunities beyond New York.

This is a Alston's big pitch: Without international equities — particularly international small caps — in your portfolio, you're not diversified and you're missing out on a big chunk of the equity market. "If you look at all the markets total, about 60% of the markets are outside of the U.S. So there's more money outside the U.S. than inside," he says.

SmartMoney.com: Why are the S&P 500 index and the Dow not useful as benchmarks?

Lance Alston: They should be irrelevant. Unfortunately, they are relevant because a lot of people don't diversify enough. They're way overweighted in large U.S. companies, so the S&P is probably giving them a good proxy for their portfolio but not a good proxy for well-diversified portfolios. When you look on most web sites at the financial section, you'll see the Dow, the S&P and Nasdaq.

In our minds, you have to have international [holdings] — not only international, but small-cap international. The large international companies are much more correlated with large U.S. companies. The smaller companies have more of a diversification effect. So international is the first step. Everybody's portfolio has to be personalized to their situation, but we say between 25% and 40% is reasonable for international. If you look at all the markets total, about 60% of the markets are outside of the U.S. So there's more money outside the U.S. than inside.

SM: What about the argument that since so much of U.S. large-cap companies' revenue is derived from overseas that you can hold them in lieu of foreign-based companies?

LA: It is true they may have operations all over world. But research I've seen shows that a company tends to behave like the domicile market. When you look at their returns, their up-and-down movement, they seem to be reacting to the market where it's domiciled. A large U.S. multinational corporation will have behavior similar to the U.S. market and a large European corporation will behave like the European market. There is revenue and operations that are international, but it seems the behavior of the stock is more closely linked to the domiciled market. You have to go beyond the multinationals; you have to go to small caps. That's where you get the diversification beyond domestic boundaries.

And we also look at currency exposure. Movements of the dollar in the last five years has been down and can affect the shares of U.S. companies. If you're buying international companies with dollars, they're priced in yen or euro, so the value of that investment increases.