Why US equity exposure is so important

For equity investors, being globally diversified is critical. It reduces risk, and in the long term, it should lead to higher returns.  A video on the Bloomsbury Wealth YouTube Channel.

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Transcript: Robin Powell & Ben Carlson/ Blogger & author.

RP: For equity investors, being globally diversified is critical. It reduces risk, and in the long term it should lead to higher returns.  There’s one market in particular that every investor should have exposure to — and that’s the United States.  Here is Ben Carlson a blogger, author and wealth manager.

BC: If you look at the global market cap, the U.S. makes up roughly 60 percent of global stock markets, and that’s increased a lot. So if you want to have a well-diversified portfolio and not have some sort of home country bias, I think owning U.S. stocks makes sense. And I think diversifying internationally is the same reason that U.S. investors should diversify internationally. There are going to be times when even the most dominant market fails to hold up its end of the bargain. In the late 1980s, Japan made up more than 40 percent of global stock markets and underperformed by a wide, wide margin since then. But you had all these other countries like the US and other countries in Europe and Asia that did much better and more than made up for those losses in Japan. So I think one of the reasons that you diversify globally and geographically is because you don’t want to be stuck investing in a single country, a handful of countries that underperform while you have all the other, these other ones doing well.

RP: Something that puts many people off investing in the US is that the S&P 500 is dominated by large technology firms — especially the so-called Magnificent Seven.  But should investors be worried about being too heavily concentrated in a small number of stocks?

BC: If you look at the history of the U.S. stock market, the big winners like that, the biggest companies tend to have outsized impact on the index itself.  And that’s actually one of the benefits of indexing is it’s a small handful of stocks that make up the majority of the long-term gains. So Henrik Bessenbinder did this study a few years ago where he looked at where have all the gains come from over the past 100 years or so. And the majority of the games came from 4 percent of the companies.  Right. It was a tiny amount. At first blush, you’d say, well, that’s fine. I’ll just avoid the losers and try to pick the winners, which obviously would be great if anyone could do that with consistency. The problem is picking those winners ahead of time is very difficult. And the great thing about index funds is that those winners tend to rise up and they more than offset the losers.

RP: As Ben Carlson says, even the US falls out of favour with investors from time to time, particularly during recessions.  But accurately timing the start and end of a recession is very challenging.

BC: You have to build these downturns into your financial and investment plan. Of course, again, you can’t hope that it’ll never happen.  You know, they’re going to happen at some point. A recession in the U.S. for the past hundred years has happened once every, you know, five or six years. So it’s going to happen. The point is that you make your portfolio durable enough to handle those periods and have a plan of attack on how to handle it, as opposed to trying to guess when it’s going to happen all the time and jump in and jump out.  And the thing is, even if you knew the exact timing of the recession, I’ve looked at this data in the past. It might not help you with your investment portfolio because a lot of times the stock market will fall before the recession starts and bottom before it’s over.

RP: There are bound to be periods when it doesn’t pay off, but, historically, long-term investors in US stocks have generally been well rewarded.

Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.