Global Diversification Is A myth

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Why I am giving up on global diversification and putting all my money in the U.S. stock market exclusively.

Early in my journey as an investor, I was led to believe that the smartest thing I could do for my portfolio was to diversify globally. So, I did. I had a bit of everything in my portfolio: Canadian stocks, U.S. stocks, European stocks, and Asian stocks—you get the idea.

Eventually, I realized that it didn’t make much difference. Everything is correlated. I couldn’t protect my portfolio form what’s called “country risk.” If one market goes down, they all go down. More specifically, if the U.S. market goes down, everyone else follows. So, what’s the point of diversification?

Let’s start with some random facts. The U.S. market now accounts for 50% of the global market. From that perspective, everyone in the world should have 50% of their portfolio in U.S. stocks if they want their portfolio to truly represent global equity.

Consider this: Nvidia, a U.S. company with a market capitalization of $3.4 trillion, is larger than the market capitalization of the German, French, or U.K. stock markets.

Germany (DAX Index): Around $2.3 trillion
France (CAC 40 Index): Around $2.8 trillion
United Kingdom (FTSE 100 Index): Around $2.5 trillion
The U.S. is home to some of the most innovative companies—Apple, Microsoft, Nvidia, Amazon, Google, Tesla, Facebook, Airbnb, and Uber. Most of these companies are manufacturers of ideas. For example, Apple and Nvidia design their products in the U.S. but produce them elsewhere. Airbnb and Uber are hospitality and transportation companies that don’t own any buildings or cars. Amazon is a double marketplace where others do the buying and selling. Microsoft, Google, and Facebook are essentially built from code on the internet. Only Tesla manufactures physical products, which are produced in the U.S., Germany, and China, and sold globally.

The globalists have won. The world is too interconnected to untangle. If you invest exclusively in the U.S. stock market, most of the revenues and manufacturing still comes from other countries. For example, if you own Apple stock and there’s a labor dispute in China (where most of the phones are manufactured), your Apple stock could suffer.

Similarly, Saudi Aramco is a global company with very little to do with Saudi Arabia’s economy, just as Rio Tinto from Australia has minimal connection to the Australian economy. Those two companies can influence global markets.

If something bad happens in the U.S., its effects are felt—and magnified—elsewhere. A 2% decline in the U.S. stock market could result in a 3% to 4% decline in Brazil or India. Changes in U.S. interest rates also affect many countries that depend on the U.S. dollar to finance their operations.

Economists like David Ricardo (18 April 1772 – 11 September 1823) was the first economist to promote the idea of globalism with his theory of comparative advantage and Thomas Friedman, author of The World is Flat, have long promoted the idea of an interconnected world, and they’ve been proven right. Over the past 20 years, every major economic crisis has spread globally: the 2008 financial crisis, COVID-19, and more.

The conclusion? There’s no real benefit in global diversification. Everything is so interconnected that you might as well invest in the most efficient market—the one with the most liquidity and transparency.

The U.S. stock market isn’t just the U.S. stock market anymore. It’s the world’s stock market. The S&P 500 is no longer just a U.S. equity index—it’s a global equity index. All of the companies within it are multinationals, with the only commonality being that they’re all incorporated in the U.S.