Two years ago, in what was one of the best birthday gifts ever, my wife surprised me with a trip to the Ryder Cup at Whistling Straits. I have to say that, as an Englishman, things up there didn’t go exactly how I would have liked but the atmosphere and the quality of the golf made it a special experience regardless of that. I will be watching this weekend as the U.S. and European teams meet again in Italy, and I will, of course, be rooting for the UK and Europe. However, when it comes to investing, my rooting interest right now is definitely for the United States. That is because that is where most of my money is invested.
But should it be?
Typically, most investors here in America exhibit a big home market bias. On average, American investors are around 90% invested in domestic markets even though the U.S. GDP as a percentage of the world’s economic output has been shrinking for some time and currently stands at around 14.5%. American stocks do account for around 40% of the world’s total equity value, but even if you use that number rather than GDP, it is clear that 10% is a serious underrepresentation of the rest of the world by American investors.
Most experts agree that, for the purpose of diversification, that number should be higher. In this advisory piece from Vanguard, for example, they recommend a minimum of 20% overseas exposure in an investor’s stock portfolio, with as much as 40% being ideal. In a world where the economy is increasingly global, that does make sense on the surface, but for most investors here, there are reasons why they will probably never get to that level of international investment.
I am not talking about the foam-finger waving, USA, USA! chanting Ryder Cup style of pro-American sentiment either. I am sure that plays a part in why so much money stays onshore here, but there are also perfectly sound reasons why someone like me, who knows all of the facts and what they should be doing, and who prides themselves on making dispassionate decisions about money, still has only just less than 20% of their capital invested outside the U.S. In fact, that is where I stand right now because I increased that percentage somewhat around a year ago, but I typically hold around 15% international stocks.
The reason for that is evident after just a glance at the 5-year comparative chart for the global ex-US stock ETF, VXUS, represented by the blue line and main body of the chart, and the S&P 500 tracker, SPY, represented by the green line.
Looking at that, a 55% gain over five years in SPY versus 6% for VXUS, one might wonder why anyone would put even 10% of their money in international stocks. Diversification is often like that, though. It can hold back overall returns at times but is designed to smooth out the bumps along the way. One could also argue that the last five years, through the Covid crisis and global inflation leading to rapid rate hikes, are exceptional. They certainly are, but American outperformance through that time actually is a result of the reason I and so many others over-invest in U.S. stocks.
For all the stupidity of a Congress that can’t pass a budget because of the far-right prioritizing their extremist policies over the national interest and for all the far left’s anti-business posturing and rhetoric, America is generally run with the best interests of its corporations in mind. Both the regulatory and tax framework in the U.S. favor businesses over consumers more than is the case in most places in the world. Whatever you may think of that from a political or moral perspective, the fact is that it is good for the U.S. stock market.
As an investor, why wouldn’t you keep the majority of your money in a country that has a business-friendly environment? There is no reason I can think of, so I will continue to do so. That is why I will be seriously rooting for the UK and Europe this weekend in the Ryder Cup, but when it comes to investing, I will continue to root for U.S. stocks over the rest of the world.
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