I am currently in the process of reweighting and simplifying my portfolio. Around 85% of my holdings are in the USA, with 15% in developed international.
As of late, I have been considering reweighting this and potentially adding in emerging market exposure.
The US has outperformed international for some time now. I can see some reasons to believe that American Exceptionalism could continue.
- Many American brands have a very high prestige around the world and can eat into international market share
- Some American companies have a technological edge which will attract business from around the globe
- The US has a very business-friendly climate and regulatory structure.
- I see storm clouds on the horizon for many developed international markets, namely the birth rate crisis, sovereign debt issues, and business-hostile climate. Emerging markets similarly have their own problems, namely political risk, and environmental/climate issues.
However I can also see some basic arguments in favor of diversification:
- Sure the US has outperformed in recent memory but that may be all the more reason for international stocks with more reasonable P/E ratios to outperform, moving forward.
- The de-dollarization process has begun. Foreign central banks now hold more Gold reserves than Treasuries for the first time in 30 years and the USA more generally is exhibiting signs of emerging market behavior. Rising populism from both parties, the erosion of Federal Reserve independence, a new push for more direct federal government management of the economy (tariffs, Intel, etc.), and the potential of monetizing the national debt all introduce a new set of risks and challenges for the US market.
- Even with immigration, the US is not immune to the demographic problems plaguing the rest of the developed world. US deaths are expected to outpace births by 2031. Emerging markets have growing populations who are becoming educated and plugged into the internet at a breakneck pace.
I'm interested to hear your arguments for and against diversification. I am pretty new to this stuff so I would really appreciate your thoughts on this issue.
Arguments for and against international diversification
byu/throwawayiran12925 ininvesting
Posted by throwawayiran12925
5 Comments
I think your first and third reasons for international diversification are certainly good to think about. I would be *extremely* careful with the second reason: hand-wringing about the US political environment and the status of the dollar has pretty much become the go-to example of smart-sounding bearish narratives that end up losing massive amounts of money.
Your first set of arguments justifies a large, perhaps overweight, position in US equities. Your second set of arguments acknowledges that the first set of arguments might be wrong and justfies hedging your bet on the US by investing at least part of your assets in foreign equities.
IIRC, the US market is ~30 per cent of the global total. Putting 15 per cent of your equity portfolio into foreign assets would mean aggressively overwighting the US.
On another issue: you mention “sovereign debt issues” in connection with non-US markets, but the US government on current policy is seriously insolvent in NPV terms, so I don’t think it’s an issue that would weigh heavily one way or another on the US vs foreign issue. It might be important in deciding how mcuh you want to allocate to alternative assets.
I feel that the US 500 is basically subsidized by incoming funds from 401Ks. The shear volume of money coming in everyday off the entire countries paychecks makes the 500 a better bet than the rest of the world….
US firms have a lot of international exposure. Buying more foreign exposure tends to lead to over exposure.
The depreciation of the US$ is expected to continue for the rest of this decade, this effect will overwhelm any gains in US equities. Look at IBND (international corporate bonds etf), massively outperformed the S&P this year.