investorguy1 wrote:Please correct me if I am wrong but the way I see it there are risks of having all of your investments in any one country no matter how big that country is. Any of the follow situations could cause big swings in US stock prices:
1. If there is rapid inflation or deflation in the US.
2. A government default.
3. Prolonged government shut down.
4. Big changes is government policy regarding taxation, wages, trade deals etc.
5. Natural disasters.
Bogle I don't think is worried about those potential scenarios hurting long term returns of US stocks. For those who are more worried about the short term or potential long term problems, adding foreign companies diversifying these risks.
It is actually these very reasons I hold U.S. only. If there is a massive inflation/deflation crisis in the United States, it is not just the United States that will be in trouble. ALL developed markets, due to the U.S.'s outsized influence in global currency markets, will suffer all the same. The reverse is not
true. If the Euro, Yen, or Yuan tanks the effect on the U.S. dollar is transitory. In fact, any effect is likely positive not negative (flight to safety). Going the other way? Not so much. For currency, the effect of the U.S. dollar is a one way mirror. Therefore holding foreign currencies actually expose you to more
black swans, not fewer. Same goes for 2 and 3. Euro government crisis? Civil unrest in Beijing? Minor, temporary effect on U.S. equities. Same issues in the U.S.? Global economic melt down. Comparing the effects of region powers, to global super powers is apples and oranges.
As for Natural disasters and war, well if the U.S. has such a massive natural disaster as to take out the economy....well the global economy is coming with us. American currency markets, banks, and our military presence around much of the world allows the current system to function. If it goes bust, there isn't anywhere to hide in equities. Same goes for war. If the South China, Korean Peninsula, or Eastern Europe sea erupts in a war foreign markets will be hit much harder than American ones. Additionally the flight to safety of American dollars, treasuries, and equities could even prove an almost anomalous "anti-fragile" effect.
Perhaps 50 years in the future, in a multi-polar world where the U.S. makes up a much smaller proportion of the world economy and the global economic/financial system the answers will be different. For now and the foreseeable horizon? I think you are exposed to more Black Swans by investing internationally than in the U.S. and this is all without referencing the demographic, regulatory, and natural resource edge the U.S. has over ALL large developed markets. Could I be wrong about those factors? Yes, but it won't matter because again if the U.S. goes down then all equities are coming with it. Reference 2008 if you don't believe me.
Then again, my view of risk is different than most. I don't see volatility as risk (unless very close to needing the money....28 year old me not so much), and a deplore anything based on back testing (even though in this case it actually supports my position).