Chapter 12
Investing Globally
The world is round.
—Eratosthenes (225 b.c.)
The world is flat.
—Indicopleustes (550 a.d.)
The world is round.
—Galileo Galilei (1610)
The world is flat.
—Thomas Friedman (2005)
The overwhelming majority of families are inappropriately diversified versus the global equity opportunity set. And because this is so, and so inappropriate, I propose to spend a considerable amount of time on the case for global investing.1
Not so long ago, it was routine for advisors to recommend allocating, say, 35 percent of a portfolio to U.S. large- and mid-cap stocks, 10 percent to U.S. small-cap stocks, and 15 percent to all non-U.S. stocks. In other words, only 25 percent of the overall equity portfolio was invested outside the United States, even though more than half the global equity market is non-US.
This huge home country bias reflected mainly inertia from the days when the U.S. equity markets dominated the world. But those days are long gone—beginning with the collapse of the Soviet Union and the adoption of free market economic models virtually everywhere. Today, the United States represents less than half the total global equity capitalization, and that percentage is highly likely to continue to shrink, as emerging economies like China, Brazil, India, and Russia grow rapidly.
Thus, if by “global investing” we mean looking for the best stocks on a global basis, regardless of where the company is domesticated, then global investing is a very rare phenomenon. American investors, even experienced investors, tend overwhelmingly to own U.S.-centric portfolios. Are investors really intending to make such a huge bet against foreign stocks? Probably not. But if not, why the low exposure to international equities?