Investing in global progress

Investors tend to have home country bias. This means they over-index in their own country.

For example, many Americans put most of their savings in an S&P 500 index fund, which are 500 of the largest American companies. US companies represent only 50% of the global stock market and only 20% of the global economy.

You lose out on the benefits of diversification. Nobel Prize-winning economist Harry Markowitz called diversification, “the only free lunch in finance.”

What if the US economy and stock market grows slowly for the next 20–30 years? What if the US economy faces a Japan-style deflation?

Rising economies like China and India each have 4x the population of the US and are growing GDP much faster every year. These countries are likely to create enormously valuable companies.

I prefer to invest in a global index fund, like Vanguard’s VT index fund. It is market-cap weighted. It has roughly 50% US, 50% non-US.

VT under-indexes on China, so I like to add an Emerging Markets index fund, VWO (heavily China), as about 15% of my portfolio. This offers a more accurate, diversified index of the world economy.

These are “hold forever” investments for me. As global indexes, they adjust weightings as the market adjusts.

Maybe in 30 years the US will still be 50% of the global stock market? 70%? 20% I don’t know, and I want to be protected.

The American economy is a miracle. It continues to innovate and grow. Business is good. But it’s not the only place to invest.