How should residents of smaller economies allocate their portfolio between domestic and foreign assets?
why should I have any bias in favour of my local economy? The main reason is because your expenses are in the local currency.   If you are planning on spending most of your money on foreign travel, that's one thing.  But for most of us, the bulk of our expenses are incurred locally.  So it makes sense for us to invest in things where the investment return is local.   You might argue that you can always exchange foreign results into local currency, and that's true.  But then you have two risks.  One risk you'll have anywhere:  your investments may go down.  The other risk with a foreign investment is that the currency may lose value relative to your currency.  If that happens, even a good performing investment can go down in terms of what it can return to you.  That fund denominated in your currency is really doing these conversions behind the scenes.   Unless the bulk of your purchases are from imports and have prices that fluctuate with your currency, you will probably be better off in local investments.  As a rough rule of thumb, your country's import percentage is a good estimate of how much you should invest globally.  That looks to be about 20% for Australia.  So consider something like 50% local stocks, 20% local bonds, 15% foreign stocks, 5% foreign bonds, and 10% local cash.  That will insulate you a bit from a weak local currency while not leaving you out to dry with a strong local currency.   It's possible that your particular expenses might be more (or less) vulnerable to foreign price fluctuations than the typical.  But hopefully this gives you a starting point until you can come up with a way of estimating your personal vulnerability. We face the same issue here in Switzerland. My background: Institutional investment management, currency risk management. My thoughs are: Home Bias is the core concept of your quesiton. You will find many research papers on this topic. The main problems with a high home bias is that the investment universe in your small local investment market is usually geared toward your coutries large corporations. Lack of diversification: In your case: the ASX top 4 are all financials, actually banks, making up almost 25% of the index. I would expect the bond market to be similarly concentrated but I dont know. In a portfolio context, this is certainly a negative. Liquidity: A smaller economy obviously has less large corporations when compared globally (check wikipedia / List_of_public_corporations_by_market_capitalization) thereby offering lower liquidity and a smaller investment universe. Currency Risk: I like your point on not taking a stance on FX. This simplifies the task to find a hedge ratio that minimises portfolio volatility when investing internationally and dealing with currencies. For equities, you would usually find that a hedge ratio anywhere from 0-30% is effective and for bonds one that ranges from 80-100%. The reason is that in an equity portfolio, currency risk contributes less to overall volatility than in a bond portfolio. Therefore you will need to hedge less to achieve the lowest possible risk. Interestingly, from a global perspective, we find, that the AUD is a special case whereby, if you hedge the AUD you actually increase total portfolio risk. Maybe it has to do with the AUD being used in carry trades a lot, but that is a wild guess. Hedged share classes: You could buy the currency hedged shared classes of investment funds to invest globally without taking currency risks. Be careful to read exactly what and how the share class implements its currency hedging though.
So far we have a case for yes and no.  I believe the correct answer is... maybe. You mention that most of your expenses are in dollars which is definitely correct, but there is an important complication that I will try to simplify greatly here.  Many of the goods you buy are priced on the international market (a good example is oil) or are made from combinations of these goods.  When the dollar is strong the price of oil is low but when the dollar is weak the price of oil is high. However, when you buy stuff like services (think a back massage) then you pay the person in dollars and the person you are paying just wants dollars so the strength of the dollar doesn't really matter. Most people's expenses are a mix of things that are priced internationally and locally with a bias toward local expenses.  If they also have a mix of investments some of which are international and depend on the strength of the dollar and some are domestic and do not, then they don't have to worry much about the strength/weakness of the dollar later when they sell their investments and buy what they want.  If the dollar is weak than the international goods will be more expensive, but at the same time international part of their portfolio will be worth more. If you plan on retiring in a different country or have 100% of your investments in emerging market stocks than it is worth thinking about either currency hedging or changing your investment mix.  However, for many people a good mix of domestic and international investments covers much of the risk that their currency will weaken while offering the benefits of diversification.  The best part is you don't need to guess if the dollar will get stronger or weaker. tl;dr: If you want your portfolio to not depend on currency moves then hedge.  If you want your retirement to not depend on currency moves then have a good mix of local and unhedged international investments. You weren't really clear about where you are in the world, what currency you are using and what you want your eventual asset allocation to be. If you're in the US, I'd recommend splitting your international investment between a Global ex-US fund like VEU (as Chris suggested in his comment) and an emerging markets ETF like VWO.  If you're not in the US, you need to think about how much you would like to invest in US equities and what approach you would like to take to do so. Also, with international funds, particularly emerging markets, low expense ratios aren't necessarily the best value. Active management may help you to avoid some of the risks associated with investing in foreign companies, particularly in emerging markets. If you still want low expenses at all cost, understand the underlying index that the ETF is pegged to. I think a greater problem would be the protection of your property right.  China hasn't shown much respect for the property rights of its own citizens - moving people off subsistence farms in order to build high-rise apartments - so I'm not certain that a foreigner could expect much protection.  A first consideration in any asset purchase should always be consideration of the strength of local property law.  By all accounts, China fails. "You are mixing issues here. And it's tough for members to answer without more detail, the current mortgage rate in your country, for one.  It's also interesting to parse out your question. ""I wish to safely invest money. Should I invest in real estate."" But then the text offers that it's not an investment, it's a home to live in. This is where the trouble is. And it effectively creates 2 questions to address.  The real question - Buy vs Rent. I know you mentioned Euros. Fortunately, mortgages aren't going to be too different, lower/higher, and tax consequence, but all can be adjusted. The New York Times offered a beautiful infographing calculator Is It Better to Rent or Buy?  For those not interested in viewing it, they run the math, and the simple punchline is this - The home/rent ratio can have an incredibly wide range. I've read real estate blogs that say the rent should be 2% of the home value. That's a 4 to 1 home/rent (per year). A neighbor rented his higher end home, and the ratio was over 25 to 1. i.e. the rent for the year was about 4% the value of the home. It's this range that makes the choice less than obvious.  The second part of your question is how to stay safely invested if you fear your own currency will collapse. That quickly morphs into too speculative a question. Some will quickly say ""gold"" and others would point out that a stockpile of weapons, ammo, and food would be the best choice to survive that." It sounds like you are soliciting opinions a little here, so I'll go ahead and give you mine, recognizing that there's a degree of arbitrariness here.  A basic portfolio consists of a few mutual funds that try to span the space of investments.  My choices given your pot: I like VLTCX because regular bond index funds have way too much weight in government securities.  Government bonds earn way too little.  The CAPM would suggest a lot more weight in bonds and international equity.  I won't put too much in bonds because...I just don't feel like it.  My international allocation is artificially low because it's always a little more costly and I'm not sure how good the diversification gains are. If you are relatively risk averse, you can hold some of your money in a high-interest online bank and only put a portion in these investments. $100K isn't all that much money but the above portfolio is, I think, sufficient for most people.  If I had a lot more I'd buy some REIT exposure, developing market equity, and maybe small cap.  If I had a ton more (several million) I'd switch to holding individual equities instead of funds and maybe start looking at alternative investments, real estate, startups, etc. A foreign stock mutual fund definitely belongs in stocks. It's composed of stocks.  Your self occupied house is definitely real estate. You don have to keep in mind,however that selling it would create costs such as rent. I wouldn't leave it out, if doing that would cause you to buy more real estate. This would cause you to be overweighted in the real estate area.  I would tend to think if a CD as cash. While it could be considered a bond, as you said the principal doesn't go down.  The REIT is the toughest one. I would really like to see a graph showing how correlated it is to the real estate market. That would determine where I would put it. For a non-technical investor (meaning someone who doesn't try to do all the various technical analysis things that theoretically point to specific investments or trends), having a diverse portfolio and rebalancing it periodically will typically be the best solution. For example, I might have a long-term-growth portfolio that is 40% broad stock market fund, 40% (large) industry specific market funds, and 20% bond funds.  If the market as a whole tanks, then I might end up in a situation where my funds are invested 30% market 35% industry 35% bonds.  Okay, sell those bonds (which are presumably high) and put that into the market (which is presumably low).  Now back to 40/40/20.   Then when the market goes up we may end up at 50/40/10, say, in which case we sell some of the broad market fund and buy some bond funds, back to 40/40/20.  Ultimately ending up always selling high (whatever is currently overperforming the other two) and buying low (whatever is underperforming).   Having the industry specific fund(s) means I can balance a bit between different sectors - maybe the healthcare industry takes a beating for a while, so that goes low, and I can sell some of my tech industry fund and buy that.   None of this depends on timing anything; you can rebalance maybe twice a year, not worrying about where the market is at that exact time, and definitely not targeting a correction specifically.  You just analyze your situation and adjust to make everything back in line with what you want. This isn't guaranteed to succeed (any more than any other strategy is), of course, and has some risk, particularly if you rebalance in the middle of a major correction (so you end up buying something that goes down more).  But for long-term investments, it should be fairly sound. There's a few different types of investments you could do. As poolie mentioned, you could split your money between the Vanguard All World ex-US and Vanguard Total Stock Market index. A similar approach would be to invest in the Vanguard Total World Stock ETF. You wouldn't have to track separate fund performances, at the downside of not being able to allocate differential amounts to the US and non-US markets (Vanguard will allocate them by market cap). You could consider investing in country-specific broad market indices like the S&P 500 and FTSE 100. While not as diversified as the world indices, they are more correlated with the country's economic outlook. Other common investing paradigms are investing in companies which have historically paid out high dividends and companies that are under-valued by the market but have good prospects for future growth. This gets in the domain of value investing, which an entire field by itself. Like Andrew mentioned, investing in a mutual fund is hassle-free. However, mutual fees/commissions and taxes can be higher (somewhere in the range 1%-5%) than index funds/ETF expense ratios (typically <0.50%), so they would have to outperform the market by a bit to break-even. There are quite a few good books out there to read up about investing. I'd recommend The Intelligent Investor and Millionaire Teacher to understand the basics of long-term investing, but of course, there are many other equally good books too. Do developing country equities have a higher return and/or lower risk   than emerging market equities?  Generally in finance you get payed more for taking risk.  Riskier stocks over the long run return more than less risky bonds, for instance.  Developing market equity is expected to give less return over the long run as it is generally less risky than emerging market equity.  One way to see that is the amount you pay for one rupee/lira/dollar/euro worth of company earnings is fewer rupees/lira and more dollars/euros. when measured in the emerging market's currency?  This makes this question interesting.  Risky emerging currencies like the rupee tend to devalue over time against less risky currencies euro/dollars/yen like where most international investment ends up, but the results are rather wild.  Think how badly Brazil has done recently and how relatively well the rupee has been doing.   This adds to the returns (roughly based on interest rates) of foreign stocks from the point of view of a emerging market investor on average but has really wild variations. Do you have data for this over a long timeframe (decades), ideally for multiple countries? Not really, unfortunately.  Good data for emerging markets is a fairly new phenomenon and even where it does exist decades ago it would have been very hard to invest like we can now so it likely is not comparable. Does foreign equity pay more or less when measured in rupees (or other   emerging market currency)? Probably less on average (theoretically and empirically) all things included though the evidence is not strong, but there is a massive amount of risk in a portfolio that is 85% in a single emerging market currency.  Think about if you were a Brazilian and needed to retire now and 85% of your portfolio was in the Real.  International goods like gas would be really expensive and your local currency portfolio would seem paltry right now.  If you want to bet on emerging markets in the long run I would suggest that you at least spread the risk over many emerging markets and add a good chunk developed to the mix. As for investing goals, it's just to maximize my return in INR, or maximize my risk-adjusted return. That is up to you, but the goal I generally recommend is making sure you are comfortable in retirement.  This usually involves looking for returns are high in the long run, but not having a ton of risk in a single currency or a single market.  There are reasons to believe a little bias toward your homeland is good as fees tend to be lower on local investments and local investments tend to track closer to your retirement costs, but too much can be very dangerous even for countries with stronger currencies, say Greece. "The term ""stock"" here refers to a static number as contrasted to flows, e.g. population vs. population growth. Stock, in this context, is not at all related to an equity instrument.  Yes, annual refinance costs, interest rate payments etc. are what we should be looking at when assessing debt burden. Those are flows. That was my point when cautioning against naive debt GDP comparisons.  Also, keep in mind that by borrowing in it's sovereign currency, the US has an enormous amount of monetary tools to handle the debt if it ever became a problem. Greece, by comparison, is at the mercy of the ECB, so they only have fiscal levers to pull. The interest expense does not strike me as especially concerning, but I'd be happy to verify BIS or IMF reports if you would like." The ruble was, is and will be very unstable because of unstable political situation in Russia and the economy strongly dependent of the export of raw resources. What you can do? I assume, you want to minimize risk. The best way to achieve that is to make your savings in some stable currency. Euro and Swiss Franc are currently very stable currencies, so storing your surpluses in them is a very good option if you want to keep your money safe. To prevent political risk, you should keep your money in countries with stable political regime, which are unlikely to 'nationalize' the savings of the citizens in predictable future. As for your existing savings in rubles, it's a hard deal. I assume, as the web developer, you have a plenty of money, which have lost a lot of value. If you convert them to euro or francs, you will preserver the current value (after the loss). You'll safe them agaist ruble falling down, but in case the ruble will return to previous value, you'll loose.  Keeping savings in instable currencies is, however, speculation, like investing in gold etc. So if you can mentally accept the loss and want to sleep good, convert them. You have also option to invest in properties, for example buy an extra appartment. It's a good way to deal with financial surplus in Europe in US, however you should be aware, in Russland it's connected with the political risk. The real estates can be confiscated in any moment by the state and you can't run away with it (the savings can also be confiscated, but there's a fair chance you'll manage to rescue them if you act quickly). would you say it's advisable to keep some of cash savings in a foreign currency? This is primarily opinion based.  Given that we live in a world rife with geopolitical risks such as Brexit and potential EU breakup There is no way to predict what will happen in such large events. For example if one keeps funds outside on UK in say Germany in Euro's. The UK may bring in a regulation and clamp down all funds held outside of UK as belonging to Government or tax these at 90% or anything absurd that negates the purpose of keeping funds outside. There are example of developing / under developed economics putting absurd capital controls. Whether UK will do or not is a speculation. If you are going to spend your live in a country, it is best to invest in country. As normal diversification, you can look at keep a small amount invested outside of country. It is a dangerous policy not to have a balance across the terms of assets. Short term reserves should remain in short term investments because they are most likely needed in the short term.  The amount can be shaved according to the probability of their respective needs, but long term asset variance usually exceed the probability of needing to use reserves. For example, replacing one month bonds paying essentially nothing with stocks that should be expected to return 9% will expose oneself to a possible sudden 50% loss.  If cash is indeed so abundant that reserves can be doubled, this policy can be expected to be stable; however, cash is normally scarce.  It is a risky policy to place reserves that have a 20% chance of being 100% liquidated into investments that have a 20% chance of declining by approximately 50% just for a chance of an extra 9% annual return. Financial stability should always be of primary concern with rate of return secondary only after stability has been reasonably assured. It's all about risk. These guidelines were all developed based on the risk characteristics of the various asset categories. Bonds are ultra-low-risk, large caps are low-risk (you don't see most big stocks like Coca-Cola going anywhere soon), foreign stocks are medium-risk (subject to additional political risk and currency risk, especially so in developing markets) and small-caps are higher risk (more to gain, but more likely to go out of business).  Moreover, the risks of different asset classes tend to balance each other out some. When stocks fall, bonds typically rise (the recent credit crunch being a notable but temporary exception) as people flock to safety or as the Fed adjusts interest rates. When stocks soar, bonds don't look as attractive, and interest rates may rise (a bummer when you already own the bonds). Is the US economy stumbling with the dollar in the dumps, while the rest of the world passes us by? Your foreign holdings will be worth more in dollar terms. If you'd like to work alternative asset classes (real estate, gold and other commodities, etc) into your mix, consider their risk characteristics, and what will make them go up and down. A good asset allocation should limit the amount of 'down' that can happen all at once; the more conservative the allocation needs to be, the less 'down' is possible (at the expense of the 'up'). .... As for what risks you are willing to take, that will depend on your position in life, and what risks you are presently are exposed to (including: your job, how stable your company is and whether it could fold or do layoffs in a recession like this one, whether you're married, whether you have kids, where you live). For instance, if you're a realtor by trade, you should probably avoid investing too much in real estate or it'll be a double-whammy if the market crashes. A good financial advisor can discuss these matters with you in detail. I think part of the confusion is due to the age of the term and how money has changed over time relative to being backed by precious metals vs using central banks etc. Historically: Because historically the coin itself was precious metal, if a change occurred between the 'face value' of the coin and value of the precious metal itself, the holder of the coin was less affected since they have the precious metal already in hand. They could always trade it based on the metal value instead of the face value. OTOH if you buy a note worth an the current price of ounce of gold, and the price of gold goes up, and then the holder wants to redeem the note, they end up with less than an ounce of gold. In the more modern age  The main concern is the cost to borrow funds to put money into circulation, or the gain when it goes out of circulation.  The big difference between the two is that bills tend stay in circulation until they wear out, have to be bought back and replaced.  Coins on the other hand last longer, but have a tendency to drop out of circulation due to collectors (especially with 'collectible series' coins that the mint seems to love to issue lately).  This means that bills issued tend to stay in circulation, while only a percentage of coins stays in circulation.  So the net effect on the money supply is different for the two, and since modern 'seigniorage' is all about the cost to put money in circulation, it is different in the case of coins where some percentage will not remain circulating.