US stocks have done far better than non-US stocks for the last quarter century. It’s not even close. And over the past decade, the out-performance has been particularly stark. US stocks have done 2.5 times better.
Not surprisingly, many clients ask: why bother to own non-US stocks? It seems the rest of the world can’t keep up with the US – at least regarding stocks.
The rationale to keep a portion of your investments outside the US is simple: the future will be different than the past. Of course, you knew that. Here’s why you should be particularly reluctant to own only US stocks.
Compared to non-US stocks, US stocks are far more expensive. Analysts often compare stock prices to earnings (P/E ratios) or accounting value (price/book ratios). US stocks are about twice as expensive as stocks outside the US. Another way to compare is dividend yields. US stocks yield less than half of non-US stocks.
The US stock market has become far less diversified than it was. Today, the market is 30% technology companies – a far higher percentage than a decade ago. These companies are certainly making the world better in myriad ways. But isn’t the world more than a handful of companies like Apple, Microsoft, Amazon, Google, and Facebook? Five technology companies represent 20% of the US stock market today. That’s a lot of risk.
Without non-US stocks, you are missing out on a lot. A broad non-US stock fund owns 8,000+ companies. Ignoring that opportunity set is a risk.
This is not an argument about whether the US economy, or US companies, are better, stronger, more profitable, or faster-growing than non-US stocks. That is not the critical point. Every stock has a price. An investor should care about whether – based on today’s stock prices – they will build wealth by only owning US stocks. As the Economist pointed out in a thoughtful column recently, you ignore foreign markets at your peril.
Our recommendation: diversify, diversify, diversify.