Global diversification is a key aspect of any portfolio. For most investors this means picking up some international stocks or thousands of them through an index fund. John Bogle, the founder of Vanguard, however personally holds no international stocks, saying explicitly in an interview for Bloomberg Business with Carla Friends that “I wouldn’t invest outside the US”. He does got on to say that “if some wants to invest 20 or less of their portfolio outside the US that’s fine”. That’s quite a surprise position from the founder of the ‘diversified buy & hold’ institution. Is a Mr. Bogle himself suffering from home country bias? Maybe, but I’d say probably not.
The SP500 is global. Bogle invests a large chunk in the SP500 for his equity allocation. Although these companies are traded on US based exchanges, they all do significant business around the world and are exposed to global factors and currencies. If an SP500 firm see’s opportunity in an emerging market, they can and will capitalize on it. As of 2014 47.8% of SP 500 revenue came from abroad, up from 41.84& is 2003. Interestingly the close to 48% of SP 500 revenue from abroad is inline with current foreign market capitalization (relative to the global market capitalization of about 54% US, and 46% foreign.)
And here’s the breakdown of where that revenue comes from.
Equity market correlation increasing. While SP500 Foreign revenue is increasing, so is correlation among the world’s markets. In the period of 2008 – 2013 US Large Cap and International Large Cap had a correlation of .91 up from .85 in the period of 2001 – 2007 according to Charles Schwab Investment Advisory. With increasing correlation there is less and less benefit of international diversification.
In Bogle’s words:
I like the U.S. The U.S. is the most productive country in the world. It is the most rapidly growing of the industrialized nations, other than Switzerland. We still have plenty of problems, but we’re much better than France, Britain and Germany. And we don’t even want to talk about Italy and Greece. And importantly — people forget this too quickly — we have the most established government and legal institutions.
He fall short here ‘Better off ‘ is relative. While I think it is fair to say globalization has merged the playing field between foreign and domestic equities, large cap in particular, which national economy is better off is a little irrelavent. As we’ve established the large multi-national firms of the SP500 are exposed to many countries national economics and market forces. Likewise the multinationals of foreign countries are exposed just as heavily to the US markets.
I think its perfectly fair for Bogle to considered the SP 500 globally diversified and leave foreign equities out of the portfolio and I’d even consider it myself. On that note, check out the total returns of an 10% investment in the US stock market Vs the foreign developed markets VS the total international. The annual return difference is a mere 1.26%