Why I am giving up on global diversification and putting all my money in the U.S. stock market.
Early in my journey as an investor, I was led to believe that the smartest thing I could do for my portfolio was to diversify globally. So, I did. I had a bit of everything in my portfolio: Canadian stocks, U.S. stocks, European stocks, and Asian stocks—you get the idea.
Eventually, I realized that it didn’t make much difference. Everything is correlated. I couldn’t protect my portfolio from what’s called “country risk.” If one market goes down, they all go down. More specifically, if the U.S. market goes down, everyone else follows. So, what’s the point of diversification?
Let’s start with some random facts. The U.S. market now accounts for over 50% of the global market. From that perspective, everyone in the world should have over 50% of their portfolio in U.S. stocks if they want their portfolio to truly represent global equity.
Consider this: Nvidia, a U.S. company with a market capitalization of $3.4 trillion, this one company by itself, is larger than the market capitalization of the German, French, or U.K. stock markets.
- Germany (DAX Index): Around $2.3 trillion
- France (CAC 40 Index): Around $2.8 trillion
- United Kingdom (FTSE 100 Index): Around $2.5 trillion
The U.S. is home to some of the most innovative companies in the world—Apple, Microsoft, Nvidia, Amazon, Google, Tesla, Facebook, Airbnb, and Uber. Most of these companies are manufacturers of ideas. For example, Apple and Nvidia design their products in the U.S. but produce them elsewhere (China, Taiwan, and India). Airbnb and Uber are hospitality and transportation companies that don’t own any buildings or cars. Amazon is a double marketplace where others do the buying and selling while Amazon mostly provides the logistics. Microsoft, Google, and Facebook are essentially software companies that sell their search and connection capabilities to everyone in the world. Only Tesla manufactures physical products, which are produced in the U.S., Germany, and China, and sold globally.
The globalists have won. The world is too interconnected to untangle. If you invest exclusively in the U.S. stock market, most of the revenues and manufacturing still comes from other countries. For example, if you own Apple stock and there’s a labor dispute in China (where most of the phones are manufactured), your Apple stock will suffer, so your portfolio is exposed to things that happen in other countries even if you only invest in U.S. companies.
Another example is Saudi Aramco, the world’s largest oil company, based in Saudi Arabia. Its revenues depend mostly on the global economy rather than the economy of Saudi Arabia. Or Rio Tinto, a mining company based in Australia, its revenues depend mostly on the global economy rather than the economy of Australia. Specifically, if there is a recession in the U.S. those far away companies will suffer immensely. So there is no purpose in investing globally if most of those global companies depend on the economic health of the U.S.
If something bad happens in the U.S., its effects are felt—and magnified—in other countries. A 2% decline in the U.S. stock market could result in a 3% to 4% decline in Brazil or India. Also, changes in U.S. interest rates affect many countries that depend on the U.S. dollar to finance their operations.
The idea of globalization has been floating around since it was first proposed by Economists David Ricardo in the 1700s (18 April 1772 – 11 September 1823) when he promoted his theory of comparative advantage among countries and Thomas Friedman, author of The World is Flat, claiming that technology advances in communication and trade have made the world one big global village. And you know what? Those economists have been proved right. Over the past 20 years, every major economic crisis has spread globally, defeating the whole purpose of diversification.
In conclusion, There’s no real benefit in global diversification. Everything is so interconnected that you might as well invest in the most efficient market—the one with the most liquidity and transparency, and lower costs.
The U.S. stock market isn’t just the U.S. stock market anymore. It’s the world’s stock market. The S&P 500 is no longer just a U.S. equity index—it’s a global equity index. All of the companies in the index are multinationals, with the only commonality being that they’re all incorporated in the U.S.
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