Posted May 14, 2024 by Ben Carlson

A batch of investors person abandoned world diversification (or astatine slightest powerfully considered it) successful caller years.

I understand why this is happening.

The U.S. banal marketplace has destroyed each comers ever since nan Great Financial Crisis ended.

Since 2009, a full U.S. banal marketplace scale money is up much than 660% while a full world scale money is up much for illustration 180%. That’s yearly returns of much than 14% per twelvemonth successful nan U.S. versus little than 7% per twelvemonth successful nan remainder of nan world.

There are bully reasons for this capacity spread — a bigger tech sector, a beardown dollar, nan U.S. system has performed better, etc.

A batch of investors presume they don’t request to clasp world stocks anymore because ample U.S. corporations get a decent chunk of income and net overseas, nan U.S. is successful a ascendant position successful nan world banal marketplace (making up astir 60% of nan wide marketplace cap), a much favorable regulatory situation for invention and nan tech sector.

I get each of that. Considering really powerful our corporations and financial markets are, it seems foolish to put extracurricular of nan United States.

Yet I still judge successful world diversification.


There is nary guarantee nan U.S. banal marketplace is going to replicate nan occurrence it has had complete nan past 15 years complete nan adjacent 15 years.

While nan U.S. banal marketplace has been nan clear victor for nan past decade and a half, nan winners thin to alteration from decade to decade.

Take a look astatine nan full returns by decade1 for various developed economies going backmost to nan 1970s:

Every decade has large winners and large losers. Just look astatine nan dispersed betwixt nan champion and worst performers successful each period. There are immoderate monolithic gaps.

U.S. domination could beryllium a motion of a paradigm displacement successful world markets aliases it could beryllium recency bias.

You don’t person to look excessively acold backmost for a mislaid decade successful U.S. stocks (it happened from 2000-2009). In nan 1970s and 1980s, U.S. stocks were person to nan bottommost of nan battalion than nan top.

I for illustration diversification arsenic a shape of consequence guidance because it helps you debar nan extremes. Yes, that intends you’ll ne'er beryllium afloat invested successful nan champion performer, but it besides intends you’ll ne'er beryllium afloat exposed to nan worst performer.

Diversification besides opens you up to astonishing winners too.

Legendary investor Peter Bernstein erstwhile said, “I position diversification not only arsenic a endurance strategy but arsenic an fierce strategy, because nan adjacent windfall mightiness travel from a astonishing place.”

International diversification mightiness not protect you against bad years aliases moreover bad cycles.

What it’s meant to do is protect you against unspeakable decades. Every state has them.

Even nan United States.

Further Reading:
The Case For International Diversification

1I utilized MSCI state stocks marketplace indexes for nan overseas markets, which intends these returns would beryllium from nan position of a U.S.-based investor, not successful section rate terms. I utilized nan S&P 500 for U.S. stocks.