Did you know that U.S. stocks make up only 42% of the value of all the planet’s equity markets? Yet, the average American investor still allocates ~72% of their stock portfolio to U.S. stocks!
Economists call this preference for investing close to home a “home bias.”
An extreme example was shown in an academic study from the 1980s. It showed that even though Sweden’s stock market represented only about 1% of the world’s stock market value, Swedish investors still put their money almost exclusively into domestic investments.
Living here in the U.S. and keeping most of your equity investments in the U.S. is a lot like working at Enron and filling your portfolio with the company’s shares.
This evening, get out your most recent account statement and look at it.
Are you over allocated to U.S. stocks?
How do you determine this threshold?
Well, one good way is to by taking a quick look at the MSCI All Country World Index which is designed to measure the equity market performance of developed and emerging markets around the world.
You will notice that 42% is allocated to U.S. stocks, 45% to foreign developed stocks, and 13% to emerging markets stocks. If you are over or under weighted in any of these areas you may wish to make changes to your portfolio so that you are properly diversified.
Plus, investing some money overseas will reduce both the upside and downside potential and allows you to obtain more consistent performance under a wider range of economic conditions. With so much talent spread out all around the globe you really never know where the next great opportunity or innovation will come from.
In China alone there are 1.3 billion people. In India there are 1.1 billion people. Many who have never owned a television. But progress is happening fast! These people are becoming educated in technical professions such as computer science and electrical engineering.
In the next decade many innovations will come from countries other than the United States. You do not want to miss it for no reason other than wanting to stay close to home.