Why is 99% of Your Portfolio Invested in the World’s 39th Best Stock Market?
Long-time readers of The Global Guru know that I track 47 global stock markets on a daily basis.
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I limit the list to countries in which you can buy exchange-traded funds (ETFs) in your U.S. brokerage account. I’ve also written before about how remarkably the U.S. stock market has outperformed the rest of the world over the past decade.
For the U.S. stock market, I look at the Vanguard Total Stock Market ETF (VTI). That's because it includes small- and mid-cap stocks, providing a complete view of the U.S market than, say, the S&P 500.
Among these 47 global stock markets, at the close of 2016, VTI ranked No. 1 over 10 years, No. 2 over five years (behind Ireland) and No. 1 over three years. Until last year, investing outside the United States had been a sucker’s bet for an entire decade!
But 2017 may have marked a turning point. So far this year, the U.S. stock market sits at a lowly #39 out of #47 with a gain of 7.26% year to date.
The Home Country Bias
If you are a U.S. investor, sticking with the U.S. stock market over the past decade has been easy to do. It also has been a winning bet.
But the real reason it has been easy is that you -- like all investors -- suffer from a “home country” bias: the preference to invest in your own country’s stock markets.
I recall reading a financial magazine in Hungary, which tried to convince its readers to invest outside of the local stock market.
This recommendation was for investors in a country with a population of less than 10 million where two-thirds of the trading in the local stock market happens in two stocks: the national oil company and the national savings bank.
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Today, the U.S. stock market currently accounts for 36% of the world’s stock market capitalization. That’s down from 45% in 2003.
So, if you want a balanced stock portfolio, you should have 64% (!) of your investments outside of the U.S. stock markets.
Does the idea of investing most of your hard-earned wealth in global stocks make you feel queasy? Of course it does.
Still, you should invest abroad for the same reason John Dillinger gave when the police asked him why he robs banks: “Because that’s where the money is.”
Why Global Investing Is Back
Timing the market is more for the lucky than the smart.
Still, “reversion to the mean” is the one rule of investing that -- with time -- always rings true.
Here’s why I think global stock markets have started just such a reversion.
Chances are, you have no interest in investing in global stocks.
- You HATE global stock markets.
Today, there is a rule of thumb in the newsletter business that if you want people NOT to read your material, just put the word “global” in the name.
(That has made it a tough slog for an e-letter called “The Global Guru.”)
After all, global stock markets have gone essentially nowhere in the past decade.
Vanguard Total Stock Market ETF (VTI) versus Vanguard FTSE All-World ex-US ETF (VEU) over 10 Years
But if negative sentiment is a necessary contrarian indicator, you could hardly ask for a better setup.
It is no secret that the U.S. stock market is expensive compared to the rest of the world. According to Star Capital Research, the U.S stock market is the 37th most expensive in the world out of the 39 stock markets it tracks. Only Denmark and Ireland ask investors to pay up more for future earnings.
- Global stock markets are very cheap.
Star Capital Research bases this on its calculation of Robert Shiller’s Cyclically Adjusted Price Earnings Index (CAPE). The Shiller-CAPE Index is defined as price divided by the average of 10 years of earnings (moving average), adjusted for inflation.
Think of it as a long-term average price-to-earnings (P/E) ratio.
Few things are predictable in investing. But given enough time, cheap stocks will get more expensive. Expensive stocks will get cheaper.
Academic studies have confirmed that the Shiller-CAPE Index explains future real stock market returns both in the United States, as well as developed global and emerging markets.
Today, the U.S. stock market trades at a Shiller-CAPE index price-to-earnings (P/E) ratio of 27.5. That's an eye-popping 64% above its historical average.
In contrast, the Shiller-CAPE Index stands at a mere 14.9 for emerging markets.
As analyst Raoul Pal has pointed out, you can buy the entire Greek stock market for the price of a single U.S. mid-cap stock like Bed Bath & Beyond Inc. (BBBY).
Chances are you've focused on U.S. stocks in 2017 more than ever.
- Global Stock Markets Have Turned Up and You Probably Haven’t Noticed.
After all, the “Trump Bump” gave you love until St. Valentine’s Day. And by some measures, U.S. investors have not had this much appetite for risk in 20 years.
But solid returns in the U.S. stock market tell you nothing about how much money you could have made investing elsewhere.
Yes, the Vanguard Total Stock Market ETF (VTI) has gained 7.26% year to date.
But the Vanguard FTSE Emerging Markets ETF (VWO) is up 11.68% so far in 2017.
And specialist funds that focus on the world’s cheapest stocks like the Cambria Global Value ETF (GVAL) are up by an even more impressive 14.46%.
So is 2017 the year that global stocks begin to make their long-awaited comeback?
The signs are as good as they have been for a long time.
And, who knows, after a few years of leaving the U.S. stock market in the dust, “global” could cease to be a dirty word in investing.
P.S. Global stock markets today are all about momentum. As is my new trading service, Momentum Trader Alert. With 29 of the 47 global stock markets I track up by at least double-digit percentages so far this year, you can be sure that you’ll see a lot of global stock picks in the service in the months ahead. To find out more, please click here.
In case you missed it, I encourage you to read my e-letter from last week about the favorite stock of Canada's Warren Buffett.
Nicholas A. Vardy
Editor, The Global Guru
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