Aren't we betting a bit too heavily on US stocks and bonds?

[hithere]

I feel I have to ask this. There is so much information on the internet with regard to investing, but most of the simple portfolios I've come across recommend that at least 60-80% of our portfolio consists of US securities. Why are we recommended not to diversify much in terms of countries in which we invest, isn't this dangerous? In terms of GDP PPP, the US economy is about 15% of the total world economy. Yet we invest two thirds or more of our money in it, and we think our holdings are diversified. How does this make sense? Enlighten me please.

[Pajamas]

I would look at stock markets, not economies or GDP, since you can't invest directly in an economy or GDP as far as I know. U.S. is something like 25-30% of total world stock market value.

It's also not a very popular opinion around here, but I avoid directly investing in countries like China and Russia, so my international holdings are very limited.

[hithere]

I would look at stock markets, not economy, since you can't invest directly in GDP as far as I know. U.S. is something like 25-30% of total world stock market value.

I was about to edit my post in order to address that. I realize that the US is perhaps the most developed country when it comes to stock markets, but still. Why are 60-80% of our portfolios in US securities, and not 25-30% which would reduce our US holdings to a fair representation of the world stock markets?

[Taylor Larimore]

I feel I have to ask this. There is so much information on the internet with regard to investing, but most of the simple portfolios I've come across recommend that at least 60-80% of our portfolio consists of US securities. Why are we recommended not to diversify much in terms of countries in which we invest, isn't this dangerous? In terms of GDP PPP, the US economy is about 15% of the total world economy. Yet we invest two thirds or more of our money in it, and we think our holdings are diversified. How does this make sense? Enlighten me please.

hithere:

The question of "How much U.S. Investors should invest in international stocks" is one of the most controversial questions we receive. To help answer that question, I wrote the following:

How Much International Stock? A Suggestion

Best wishes.
Taylor

[alex_686]

By free float market weight the US equity markets makes up about 50% of the world cap. So a neutral position would be 50% US.

There are a couple of key takeaways here. The link between a country stock market and a country's GDP is low. Mega-cap multinationals dominate the indexes. Where there are incorporated and where they do business is weak. For example, by revenue, 50% of revenue from US countries come from outside of the US. Large chunks of Chinese capital are held by the government and thus is off the market. The US is one of the few markets where people raise capital with equity, or the exit strategy is to go public. In Europe there are more family business that raise capital via bank loans.

Bonds have currency risk. For equities currency risk is fairly low. Equities is a good hedge and other factors tend to swamp currency risk. Bonds don't have these advantages. That being said, hedge global bond funds are rapidly becoming popular.

[livesoft]

People are xenophobic, racist, patriotic, nationalistic, and whatever. Maybe not all people and not all the time. Thankfully, it's a free country and people can invest the way they want to without worrying about what others tell them nor what others think of them. People don't have to invest in a "fair" nor rational nor logical way.

[hithere]

I feel I have to ask this. There is so much information on the internet with regard to investing, but most of the simple portfolios I've come across recommend that at least 60-80% of our portfolio consists of US securities. Why are we recommended not to diversify much in terms of countries in which we invest, isn't this dangerous? In terms of GDP PPP, the US economy is about 15% of the total world economy. Yet we invest two thirds or more of our money in it, and we think our holdings are diversified. How does this make sense? Enlighten me please.

hithere:

The question of "How much U.S. Investors should invest in international stocks" is one of the most controversial questions we receive. To help answer that question, I wrote the following:

How Much International Stock? A Suggestion

Best wishes.
Taylor

Thanks, I'll read that in a moment. I'm from Europe and lately I've been thinking about how much I should invest in my home country's stock market, European stocks, US stocks, developed and emerging markets, etc.

[whodidntante]

I think 50% ex-US is a reasonable allocation for stocks. I am currently slightly over that due to recent outperformance of my foreign holdings.

[LazyNihilist]

By free float market weight the US equity markets makes up about 50% of the world cap. So a neutral position would be 50% US.

There are a couple of key takeaways here. The link between a country stock market and a country's GDP is low. Mega-cap multinationals dominate the indexes. Where there are incorporated and where they do business is weak. For example, by revenue, 50% of revenue from US countries come from outside of the US. Large chunks of Chinese capital are held by the government and thus is off the market. The US is one of the few markets where people raise capital with equity, or the exit strategy is to go public. In Europe there are more family business that raise capital via bank loans.

Bonds have currency risk. For equities currency risk is fairly low. Equities is a good hedge and other factors tend to swamp currency risk. Bonds don't have these advantages. That being said, hedge global bond funds are rapidly becoming popular.

I'm curious, how can I find what each countries free float market weight is?

[alex_686]

Thanks, I'll read that in a moment. I'm from Europe and lately I've been thinking about how much I should invest in my home country's stock market, European stocks, US stocks, developed and emerging markets, etc.

Here are the top 10 holdings of the Vanguard European Stock Index Fund.
1 Royal Dutch Shell plc
2 Nestle SA
3 HSBC Holdings plc
4 Novartis AG
5 Roche Holding AG
6 Unilever
7 British American Tobacco plc
8 TOTAL SA
9 BP plc
10 Banco Santander SA

3 are Swiss. From a GNP perspective does that sound right?
3 are quasi-American, with over 40% revenue and shareholders coming from the US.
There is 1 Hong Kong company.
The UK is hitting above its weight. I am not seeing any German, French, or Italian firms.
etc.

[alex_686]

I'm curious, how can I find what each countries free float market weight is?

The best choice, in my opinion, would be to go to the indexer's website. MSCI and FTSE are the 2 big ones. Or go to the multinational index fund of your choice. Their fact sheet normally has that data. If not, the annual report.

[Jack FFR1846]

It's also not a very popular opinion around here, but I avoid directly investing in countries like China and Russia, so my international holdings are very limited.

It's popular with me. I hold only Developed International because I want nothing to do with Russia or China.

[Nate79]

The world's economies and multinational companies are so interconnected I do not find the need to worry too much about having the exact right percentage of US:International asset allocation. The companies outside the US do business in the US. The companies in the US do business outside the US. I have to wonder if there is actually such a thing as US/International anymore when it comes to asset allocation. The correlation is so close anyways.

I do 20% international to get exposure to companies located outside the US.

[Pajamas]

People are xenophobic, racist, patriotic, nationalistic, and whatever. Maybe not all people and not all the time.

For me, it has nothing to do with any of those reasons or anything similar.

[runner540]

Compounding this issue is the fact that for most U.S.-based investors, their non-financial assets (home, human capital, language skills, social/professional network, etc.) are also heavily weighted toward the U.S.

[lotusflower]

Here are the top 10 holdings of the Vanguard European Stock Index Fund.
...
3 HSBC Holdings plc
...

3 are Swiss. From a GNP perspective does that sound right?
3 are quasi-American, with over 40% revenue and shareholders coming from the US.
There is 1 Hong Kong company.
The UK is hitting above its weight. I am not seeing any German, French, or Italian firms.
etc.

I don't see any Hong Kong companies there.

[longleaf]

Vanguard Total World Stock ETF

Seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets.

[aj76er]

You might be interested in Bill Sharpe's World Bond Stock Portfolio. If you type that in the search or (Bill Sharpe WBS), you will find some threads about it.

Here is an ongoing Wiki page about the portfolio:

https://www.bogleheads.org/wiki/World_B ... _Portfolio

[alex_686]

Here are the top 10 holdings of the Vanguard European Stock Index Fund.
...
3 HSBC Holdings plc
...

3 are Swiss. From a GNP perspective does that sound right?
3 are quasi-American, with over 40% revenue and shareholders coming from the US.
There is 1 Hong Kong company.
The UK is hitting above its weight. I am not seeing any German, French, or Italian firms.
etc.

I don't see any Hong Kong companies there.

HSBC, The Hongkong and Shanghai Banking Corporation, is not a Hong Kong company?

HSBC has shifted its dominical and headquarters a couple of times, and last I heard was looking to shift back to HK.

[ruralavalon]

I would look at stock markets, not economy, since you can't invest directly in GDP as far as I know. U.S. is something like 25-30% of total world stock market value.

I was about to edit my post in order to address that. I realize that the US is perhaps the most developed country when it comes to stock markets, but still. Why are 60-80% of our portfolios in US securities, and not 25-30% which would reduce our US holdings to a fair representation of the world stock markets?

It varies over time, but currently the U.S. stock market is about 1/2 of the total world stock market.

It has varied considerably at different times, but historically 100% of the diversification benefit has been achieved with just 40% of stocks in international stocks, and about 99% of the diversification benefit has been achieved with just 30% of stocks in international stocks. There is a fairly high correlation between U.S. and international stocks, and the magnitude of the diversification benefit has been fairly small.

[lotusflower]

Here are the top 10 holdings of the Vanguard European Stock Index Fund.
...
3 HSBC Holdings plc
...

3 are Swiss. From a GNP perspective does that sound right?
3 are quasi-American, with over 40% revenue and shareholders coming from the US.
There is 1 Hong Kong company.
The UK is hitting above its weight. I am not seeing any German, French, or Italian firms.
etc.

I don't see any Hong Kong companies there.

HSBC, The Hongkong and Shanghai Banking Corporation, is not a Hong Kong company?

HSBC has shifted its dominical and headquarters a couple of times, and last I heard was looking to shift back to HK.

It's a British company, much like all of Hong Kong used to be.

[alex_686]

It's a British company, much like all of Hong Kong used to be.

Why is it British? It's headquarters might be in London but most of its profits are overseas. It thinks its future is in Asia and is moving people and assets over there. I mean, it has more customer accounts by value in HK then it does in the UK. Its making more profits in Asia than Eurpoe. At what point does it stop being British?

To the OP, if you look at the US, Britain, and Switzerland you will see that they are punching above their weight. It is not because they are great countries - they are but that is not the point. The point is that companies tend to headquarters and list in these countries. As multinationals grow in strength the correlation between home market and home GNP is falling.

[Dottie57]

I would look at stock markets, not economy, since you can't invest directly in GDP as far as I know. U.S. is something like 25-30% of total world stock market value.

I was about to edit my post in order to address that. I realize that the US is perhaps the most developed country when it comes to stock markets, but still. Why are 60-80% of our portfolios in US securities, and not 25-30% which would reduce our US holdings to a fair representation of the world stock markets?

It varies over time, but currently the U.S. stock market is about 1/2 of the total world stock market.

It has varied considerably at different times, but historically 100% of the diversification benefit has been achieved with just 40% of stocks in international stocks, and about 99% of the diversification benefit has been achieved with just 30% of stocks in international stocks. There is a fairly high correlation between U.S. and international stocks, and the magnitude of the diversification benefit has been fairly small.

Thank you for this post. I have 30% of equities in international and have not been able to persuade myself to do more. Feel better after reading your post.

[TimeRunner]

Link to Vanguard's white paper if you can't find something more fun to read: https://www.vanguard.com/pdf/ISGGEB.pdf

[carguyny]

The world's economies and multinational companies are so interconnected I do not find the need to worry too much about having the exact right percentage of US:International asset allocation. The companies outside the US do business in the US. The companies in the US do business outside the US. I have to wonder if there is actually such a thing as US/International anymore when it comes to asset allocation. The correlation is so close anyways.

I do 20% international to get exposure to companies located outside the US.

This is true, but there are pretty big sector differences between International and the US which can lead to unintended sector tilts. One example, and perhaps the most extreme one is Technology, which is 21.5% of VTI (Total US) and 11.5% of VXUS (Total International).

[Valuethinker]

Thanks, I'll read that in a moment. I'm from Europe and lately I've been thinking about how much I should invest in my home country's stock market, European stocks, US stocks, developed and emerging markets, etc.

Here are the top 10 holdings of the Vanguard European Stock Index Fund.
1 Royal Dutch Shell plc
2 Nestle SA
3 HSBC Holdings plc
4 Novartis AG
5 Roche Holding AG
6 Unilever
7 British American Tobacco plc
8 TOTAL SA
9 BP plc
10 Banco Santander SA

3 are Swiss. From a GNP perspective does that sound right?
3 are quasi-American, with over 40% revenue and shareholders coming from the US.
There is 1 Hong Kong company.
The UK is hitting above its weight. I am not seeing any German, French, or Italian firms.
etc.

TOTAL SA is French.

The point is these things are totally international. Shell is a Dutch-British company. Nestle/ Novartis/ Roche are Swiss HQ'd.

HSBC has a large retail banking presence in the UK. So does Santander (they bought what was Abbey National).

[jhfenton]

I feel I have to ask this. There is so much information on the internet with regard to investing, but most of the simple portfolios I've come across recommend that at least 60-80% of our portfolio consists of US securities. Why are we recommended not to diversify much in terms of countries in which we invest, isn't this dangerous? In terms of GDP PPP, the US economy is about 15% of the total world economy. Yet we invest two thirds or more of our money in it, and we think our holdings are diversified. How does this make sense? Enlighten me please.

Who is this “we” you speak of? “We” are 50% ex-US, 50% US.

[harvestbook]

Lots of cognitive bias behind it (recency bias, home bias, Dunning-Kruger effect, confirmation bias), as well as perfectly sound logic that I happen to disagree with. I'm sure the Dutch were totally hot for companies in the Netherlands in the 1600s and the British of the 1800s thought they would rule the world forever, and then there was Germany and that Thousand Year Reich thing.

I believe the future won't be like the past. So I stay 50/50 and hope I'm half right.

[Who]

I feel I have to ask this. There is so much information on the internet with regard to investing, but most of the simple portfolios I've come across recommend that at least 60-80% of our portfolio consists of US securities. Why are we recommended not to diversify much in terms of countries in which we invest, isn't this dangerous? In terms of GDP PPP, the US economy is about 15% of the total world economy. Yet we invest two thirds or more of our money in it, and we think our holdings are diversified. How does this make sense? Enlighten me please.

That is an excellent question! You are very smart to ask it. (I say that because I also ask it. )

Read as much as you can, find people you understand and can teach you things, and get as many inputs as you can. Don't follow any one guru alone -- it's good to have conflicting views. Do not go "all-in" to any belief or system, nobody is right all the time. Use you own brain in the end, after evaluating what you see.

I just finished pushing enough over that I am 50/50 US/international now. I think I'll stop here, but I'm keeping an eye on it.

[naha66]

We are always trying to come up for reasons why the USA always has higher returns. One of the reason could on how they run there companies, take Volkswagen. Their Board of Supervisory Members(Board of Directors) have 9 union and 1 politician out of 20.The company is run for the benefit of all including workers and the area where their plants are. The politician is the mayor of Lower Saxony where VW has 5 major plants and there HQ's. I'm not saying this is bad, in fact it might better than our model where quite a few boards are made up of other CEO's and retired CEO's.

[Alexa9]

The US economy is regulated where it needs to be and not regulated where it shouldn't be, less corruption than most foreign markets, business and investor friendly, and a relatively stable government and currency. That said, I think global market cap is a good starting point. Some people that work for large corporations or government in the US make a good case for investing 100% international. Thankfully you have that choice.

[RadAudit]

but most of the simple portfolios I've come across recommend that at least 60-80% of our portfolio consists of US securities.

Were the articles written for a US audience? If so, they may be shading their advice toward the hometown crowd's preferences.

I'm from Europe and lately I've been thinking about how much I should invest in my home country's stock market, European stocks, US stocks, developed and emerging markets, etc.

In that case, 50 / 50 US / total international still seems like good advice to me for the equity side. Especially if you are retiring to Europe vs. the US.

[3funder]

It's also not a very popular opinion around here, but I avoid directly investing in countries like China and Russia, so my international holdings are very limited.

It's popular with me. I hold only Developed International because I want nothing to do with Russia or China.

I want nothing to do with Russia, but I do want modest exposure to China.

[goodenyou]

My personal decision on international exposure has more to do with stability of governments, accountability and transparency. In my opinion, there are several markets around the world including China and Russia that are seriously lacking in this criterion. The quality, not just size, of a market is important in my investment decisions.

[letsgobobby]

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