The Long Term Investor
The Hidden Risks of U.S. Stocks and Why Global Diversification Still Matters (EP.190)
Feb 5, 2025
The discussion dives into the hidden risks of over-relying on U.S. stocks, emphasizing that what goes up doesn't always stay up. It highlights historical cycles, revealing how market dominance shifts. Valuation gaps between U.S. and international stocks present new opportunities for savvy investors. Listeners are encouraged to confront their psychological biases and consider global diversification as a strategy for long-term success, risk management, and minimizing regret.
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Quick takeaways
- Relying solely on U.S. stocks is risky due to historical performance cycles, emphasizing the need for global diversification.
- Investors often face psychological challenges with diversification, as recency bias makes them underestimate the importance of international exposure.
Deep dives
The Case for Global Diversification in Investing
Focusing solely on U.S. stocks poses significant risks for investors, despite their recent dominance in the market. Historical trends show that stock market performance is cyclical, meaning periods of U.S. outperformance can be followed by stretches where international stocks outperform. For instance, data indicated that from 1970 to 2011, international stocks delivered better returns compared to U.S. stocks, highlighting the importance of not relying on recent trends to dictate future performance. Investors must remember that including a global perspective can diversify risks and enhance potential gains, as valuation gaps between U.S. and international stocks become increasingly pronounced.
