The latest thinking from Greenspring Advisors.

Another Reason Why Global Diversification Matters

J. Patrick Collins Jr., CFP®, EA

One of the arguments I have heard over the last several years is whether investors truly need global diversification.  The argument goes like this:  nearly 50% of the revenue from the S&P 500 comes from overseas, so aren't I getting diversification to other countries by owning the S&P 500 since globalization is just so much more prevalent these days?  It is not surprising that this argument has surfaced after 5 years of significant outperformance from the US stock market over both foreign developed stocks and emerging markets.  Investors tend to make arguments suggesting why a simple investing theme no longer applies AFTER it has been out of favor (think about the late 1990s when many argued that earnings didn't really matter anymore).  

Nevertheless, it is an interesting thesis and to some extent is correct. Things are more global these days.  Multinational companies sell all over the world.  But recent research from Credit Suisse (via ETF.com) suggest that global diversification is still valuable for another reason:

just as industries can be concentrated within a few countries, so countries can be dominated by a handful of industries.” For example, “the weighting of the three largest industries accounts for at least 40% of country capitalization for 42 out of the 47 countries; for at least 50% for 33 countries; for at least 60% for 21 countries; and for 70% or more in 15 countries.

While the US is much more diversified across industries than other countries, we still have our overweights:

The U.S. is among the countries least concentrated by industry, but we still have “a heavy weighting in technology (17%), high weightings in oil and gas, health care and consumer services, and lower weightings in basic materials, consumer goods and telecoms.”

Some countries just tend to be more focused on specific industries either due to natural resources, country demographics, education, or history.  Focusing your portfolio on  one country (or handful of countries) may be targeting a smaller group of industries that could have been available to you had you invested in a global portfolio.  While a home country bias probably makes sense for most investors, that doesn't mean you should ignore the rest of the world.