Most individual investors have the overwhelming majority of their equity investments in the US stock market. Investment professionals have historically encouraged this allocation under the slogan of ‘efficient frontier’, that a domestic overweight portfolio will reduce their risk and improve their returns over time.
The problem with that approach is that it ignores both recent and future economic trends. In fact, the case can be made that you are in fact reducing your potential returns and increasing your risk with a domestic heavy portfolio.
The chart below shows the market capitalizations of the US and non-US stock markets over the past ten years. As you can see, the value of the US stock market as a percentage of total world stock market valuation has been steadily decreasing. Had you been overweight international markets past ten years you would have been better off.
Some of that trend has no doubt been due to a decline in the value of our currency, but the majority of the change is do to the shifting sources of economic growth in the world.
A fair question might be, “that was the past ten years; how do you know the same trends will continue in the future?” I can’t answer that question with certainty, but with our economy in a mini-great depression, our budget deficits and debt growing by the trillions, and emerging markets continuing their torrid economic growth, it seems apparent to me a turnaround in that trend is unlikely anytime soon.
Protect yourself and be smart. Take another look at your allocation to international markets, and especially emerging ones.