Can You Hedge Retirement Risk If Your Employer Is Uncle Sam?

Personal-finance experts often warn people not to invest too heavily in the company that provides their paychecks, because if your employer winds up in trouble, you can find your portfolio's value getting crushed at the same moment your income stops. But when your boss is the U.S. government, the calculation gets a bit peculiar, because the situations that might cause Washington to come up short on pensions or paychecks would almost certainly tank the rest of the U.S. economy, too.

In this Motley Fool Answers mailbag segment, hosts Alison Southwick and Robert Brokamp -- and special guest Sean Gates, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool -- consider whether putting a greater share of your portfolio into international stocks would be the right way to balance the risks.

A full transcript follows the video.

Check out the latest earnings call transcripts for companies we cover.  

This video was recorded on Jan. 29, 2019.

Alison Southwick: The next question comes from Kurt. "We hear so often that investing in large-cap funds in the U.S. stock market is like, 'betting on America.' For those of us with federal or military pensions, a large chunk of our future retirement income is already directly tied to the U.S. government's ability to pay in the future, which is arguably dependent on the success of the U.S. stock market. Considering this, should people who will depend on a federal pension invest more in international or other investments, or should we double down on America?"

Robert Brokamp: I thought this was a really interesting question because I've never considered it or seen it discussed before. The overall principle of factoring your pension into your overall asset allocation definitely makes sense and it's similar to what we just talked about with Social Security. If you were getting your pension from a car manufacturer, I would definitely say that maybe you would want to hold off on buying too many car stocks.

The government is a little different. Previously, we would have all said that a government pension is pretty darn safe and you don't have to worry about things. Then comes the shutdown. I read on Military.com where 50,000 coast guard retirees are at risk of not getting their pension check on Feb. 1 due to the shutdown. Now, I think they'll get their check and if they don't get it Feb. 1 it will eventually come.

But I do feel like we're almost in new world in terms of where we question things that we always took for granted. So as Kurt brings up the question, I feel that maybe you should. One the one hand, I definitely think every retiree should have some international investments, but maybe you should have a little bit more if you're getting your pension from this big company known as the United State of America.

The flip side of that is that international stocks are more volatile and volatility can be very worrisome to retirees because retirees don't often have the time to ride out a bear market and they're forced to sell when things are down. Furthermore, international stocks have an additional risk in that they have currency risk. Even though the stocks, themselves, might be fine, if the dollar moves in a different direction than the currency of those companies, your purchasing power may come down. That's standard financial planning advice -- that one reason to reduce your international exposure is to reduce your currency risk, because you've got to turn your portfolio into dollars that you spend.

I don't have a really good answer for you. It's an intriguing question that I'll have to ponder some more, but I don't think these days it's a bad idea to consider having a little bit more if so much of your retirement is relying on the government.

Southwick: Bro's going to have to hit the books on that one.

Brokamp: I'm going to have to cogitate on that one a little longer.

Sean Gates: I just would offer up a few data points on perspective. Outside of this commentary, which I think is valid, international stocks tend to make up more than 50% of global market capitalization. A lot of other robo-advisors who have smart people coming up with asset allocation guidance for thousands of clients tend to have their portfolios around 40% in international.

When I run into clients at Motley Fool Wealth Management, a sister company of The Motley Fool, the tendency for Foolish investors is that they are severely underweight international stocks. That's partly our fault. We don't have an international service to speak of, but it's just something to think about in that most people are underweight international stocks and, to be perfectly candid, those people have been rewarded over the last eight to 10 years, because international stocks have not done well over the last eight to 10 years and it's a little bit of a compounding factor. Just some stuff to think about as you weigh this quandary.