I Don’t Feel Overweight

(The below was a tweetstorm I thought I’d republish on the blog…)

I’ve been very vocal the last few years about the importance of global investment diversification, yet most Americans continue to allocate 80% to US stocks.  

Let me explain, with some help from Bridgewater, why that is a horrible, and easily avoidable mistake.

How do I know you put 80% in the US? I wrote a book on stock market valuations (free here: “Global Value”), and used to give speeches and ask people the same question. We’d collect the responses and the answer was always the same: 80%.

Our Twitter poll had the same outcome.



If you look at the global stock market weighted by size, the US is only about half, but most of you invest 80%. (via JP Morgan)



This extreme overweight even has a behavioral description: home country bias. This happens all around the world and is even more egregious elsewhere since most countries have a much smaller % of total market cap. (via Vanguard)



If you’re investing 80% that means you are making a massive active bet that that US stock market will outperform the rest of the world. (Pat yourself on the back if you’ve been lucky and done this the past 10 years). So why am I pounding the table that this is such a bad idea?

Over the past 70 years the US stock market has been a darling, outperforming foreign stocks by 1% per year. $10k invested in US stocks in 1950 turned into $14 million vs. only $8m in foreign stocks. Want to know how much of that outperformance has come since 2009?

All of it!

This has led the US to where we are today with the US stock market as the largest in the world, by far. But the largest stocks/countries/sectors usually underperform going forward. The culprit is market cap weighting.

This is “the market” according to the TRUE passive investor. But why is market cap weighting sub-optimal?

Here’s a chart from Ned Davis that compares the S&P 500 to investing in the largest stock in the market at the time. It’s a laundry list of the top American companies like Wal-Mart, Google, IBM, and Amazon.

And it’s a HORRIBLE idea.



It’s just capitalism and its creative destruction and it’s the way it should be. But there’s also a flaw with market cap weighting in that there is no tether to fundamentals. So a market cap index often overweights expensive stocks.

Research Affiliates has some great research on the topic where they show investing in the largest stock in each market or sector goes on to underperform by 3 percentage points per year for a decade!

This is why almost ANY weighting methodology should outperform – including equal weight, value tilts, fundamental weight, or index where the CEO eats hamburgers or cheeseburgers. This matters ESPECIALLY right now as the US stock market is expensive.

So, the bad news, is the US is expensive on valuation….(2nd highest in the world.) The good news, most of the world is normal to cheap, and emerging markets are really cheap. The cheapest bucket is screaming cheap.


But you don’t have to take my word for it, let’s review a great new piece from Bridgewater: “Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated

A few quotes…

“In the past century, there have been many times when investors concentrated in one country saw their wealth wiped out by geopolitical upheavals, debt crises, monetary reforms, or the bursting of bubbles, while markets in other countries remained resilient.”

“And no one country consistently outperforms, as outperformance can lead to relative overvaluation and a subsequent reversal…So geographic diversification has big upside and little downside for investors.”

“To illustrate the impact of geographic diversification, we begin by looking at the characteristics of return streams from single countries relative to weighting a portfolio equally across countries, rebalancing annually. “


“An investor concentrated in Russia or Germany in the early 20th century would have lost most or all of their wealth, while an equally weighted mix of the five countries shown below does almost as well as the best performer.”

“In the charts below, the gray lines represent individual countries, with the US called out in dark gray, while the equally weighted mix is shown in red.”


“The geographically diversified portfolios do so well because they minimize drawdowns, creating a much more consistent return stream that allows for faster compounding.”

Me: The US stock market has underperformed equal weighting in 8 of 12 decades. Let that sink in if you plan on extrapolating recent outperformance!!!

“There are plenty of instances in which geographic diversification has been a lifesaver, preventing wealth from being wiped out…Most countries have worse drawdowns in their history than the equally weighted portfolio has ever had…”



My Summary:

The US opportunity set is poor

Diversifying globally can save your butt

Investors should move to a minimum 50% US / 50% Foreign stock

Consider adding additional value or other tilts like equal weight (this is uncomfortable for some)

Relax and sleep tight!