Is there a reason you only invest in the US stock market and not the whole world (VTWAX)? Or is VTSAX good enough and it’s not worth the effort to decide whether you should globally diversify and in what proportion?
I knew someone was going to ask that. Yes, it’s impure indexing, it’s true. The reason is the returns to date on the whole-world indexes have been lower, the expense is a bit higher, and after thinking about it, I decided that I do have a small opinion about the US overperforming (mostly due to tech/AI and a general sense that people persistently underestimate the US economically) and feel pessimistic about the rest of the world. Check back in 20 years to see how that decision worked out...
That’s an interesting argument I hadn’t heard before. It makes sense, although I think this argument can at best be used to rule out stocks of developing nations. That still leaves developed nations. So one might then diversify their stock holdings by adding some, say, Vanguard FTSE Developed Markets ETF (VEA) in addition to their VTSAX/VTI.
One argument is that the US stock market already contains a lot of global exposure as many/most large US firms are internationally diversified themselves. Buying global funds means you’re actually under-investing in the USA relative to the world as 40% of your “US companies” are actually global companies.
I don’t vouch for this argument, it’s just something I’ve heard which sounds somewhat plausible.
I’m not a fan of this argument because even if you have some global coverage, why not get more and reap the benefits of diversification? It’s like saying hey I already own 2 car company stocks, there’s no point in owning all US car company stocks. Sure the stocks might move in tandem most of the time, but diversification allows you to reduce risk.
Hmmm. So I don’t think more global exposure = more diversified. What you should be aiming for is investing in each country/region in proportion to it’s share of the market.
Consider the following situation
The USA is 30% of global markets
A global index fund invests in world equities, putting 30% of it’s money in the US market
The US market is actually also 50% invested abroad
Hence the index fund is really only putting 15% (30/2) in the US and is underweighted towards the US
Is there a reason you only invest in the US stock market and not the whole world (VTWAX)? Or is VTSAX good enough and it’s not worth the effort to decide whether you should globally diversify and in what proportion?
I knew someone was going to ask that. Yes, it’s impure indexing, it’s true. The reason is the returns to date on the whole-world indexes have been lower, the expense is a bit higher, and after thinking about it, I decided that I do have a small opinion about the US overperforming (mostly due to tech/AI and a general sense that people persistently underestimate the US economically) and feel pessimistic about the rest of the world. Check back in 20 years to see how that decision worked out...
Thanks. I’m just trying to understand what people’s reasons are. My portfolio is also US-weighted more than market caps would dictate.
EMH requires liquid markets where you can’t cheat. Buying non-US stocks may be putting you on the wrong side of an inefficient market.
That’s an interesting argument I hadn’t heard before. It makes sense, although I think this argument can at best be used to rule out stocks of developing nations. That still leaves developed nations. So one might then diversify their stock holdings by adding some, say, Vanguard FTSE Developed Markets ETF (VEA) in addition to their VTSAX/VTI.
One argument is that the US stock market already contains a lot of global exposure as many/most large US firms are internationally diversified themselves. Buying global funds means you’re actually under-investing in the USA relative to the world as 40% of your “US companies” are actually global companies.
I don’t vouch for this argument, it’s just something I’ve heard which sounds somewhat plausible.
I’m not a fan of this argument because even if you have some global coverage, why not get more and reap the benefits of diversification? It’s like saying hey I already own 2 car company stocks, there’s no point in owning all US car company stocks. Sure the stocks might move in tandem most of the time, but diversification allows you to reduce risk.
Hmmm. So I don’t think more global exposure = more diversified. What you should be aiming for is investing in each country/region in proportion to it’s share of the market.
Consider the following situation
The USA is 30% of global markets
A global index fund invests in world equities, putting 30% of it’s money in the US market
The US market is actually also 50% invested abroad
Hence the index fund is really only putting 15% (30/2) in the US and is underweighted towards the US