Home Country Bias: Why Betting Only on the S&P 500 is a Dangerous Mistake
Home Country Bias: Why Betting Only on the S&P 500 is a Dangerous Mistake
CORE INSIGHTS
- Recency Bias Trap: The US market’s dominance is historically abnormal. Since 1970, international stocks have outperformed the US in nearly 50% of cycles.
- Valuation Gap: US stocks trade at a high premium (Expensive). International stocks trade at a discount (Cheap). Buying International now buys more earnings per dollar.
- Currency Hedge: Holding foreign assets protects your purchasing power if the US Dollar weakens. A 100% US portfolio is a concentrated bet on one currency.
“Home Country Bias” is the mistake of overweighting your own country’s stocks. While the S&P 500 has been a rocket ship, market leadership rotates. By ignoring 40% of the world’s market, you are not patriotic—you are undiversified.
What-If Scenario: The Lost Decade (2000-2009)
| Portfolio | 10-Year Return | Outcome |
|---|---|---|
| 100% S&P 500 | -9% (Negative) | Lost Principal |
| Global Mix | +162% (EM Wins) | Portfolio Growth |
Visualizing Market Leadership Cycles
*Figure 1: Annualized Returns by Decade. The winner flips every 10 years.*
Strategic Action Steps
1
Check Your Allocation
Log into your brokerage. If your “Non-US” equity is 0-5%, you are tilted. A neutral starting point is 20% of equities.
Log into your brokerage. If your “Non-US” equity is 0-5%, you are tilted. A neutral starting point is 20% of equities.
2
Use Taxable Accounts
Place International ETFs (VXUS) in your Taxable Account. This lets you claim the Foreign Tax Credit (#117), a “free lunch” boost.
Place International ETFs (VXUS) in your Taxable Account. This lets you claim the Foreign Tax Credit (#117), a “free lunch” boost.
3
Rebalance into Weakness
If US keeps rising, sell US to buy International. This discipline ensures you accumulate cheap shares before the cycle turns.
If US keeps rising, sell US to buy International. This discipline ensures you accumulate cheap shares before the cycle turns.
The Bottom Line: Who Should Choose What?
- 100% US (VTI): Investors who believe US exceptionalism will last forever and accept concentration risk.
- Global Mix (VTI+VXUS): Investors who admit they cannot predict the future and want to own the entire haystack.
Frequently Asked Questions
Why buy International stocks if the US always wins?
The US does not always win. In the 2000s, the S&P 500 lost money while Emerging Markets soared. Leadership is cyclical.
Doesn’t the S&P 500 already give global exposure?
Partially, but US companies are tied to the US dollar and economy. True diversification requires exposure to different currencies and regimes.
What is the ideal International allocation?
The global market is ~40% International. A neutral weight is 40%, but many experts suggest 20-30% to balance currency volatility.
Disclaimer: This content is for informational purposes only. International investing involves currency risk. Consult a professional.