Is just invest in the US market dumb?

[westmedsupply]

Hey everyone, I’ve been investing in the US market for about 1-3 years now. Recently, I had a conversation with a friend about exclusively investing in the US market. I received a lot of feedback, with some suggesting that solely focusing on one country might not be the wisest approach. They mentioned concerns about potential setbacks, such as experiencing a ‘lost decade’ or becoming too reliant on a single market.

Their input has made me reconsider my investment strategy. Currently, I’m holding equally allocation of VOO, QQQ, and SCHD, but I’m contemplating whether I should diversify further by adding an international ETF like VT to my portfolio. I’m 27 years old and plan to invest until retirement. I started this portfolio in 2021, and I’m satisfied with its current performance.

I’d love to hear your thoughts. Is it unwise to solely invest in the US market?

 

[tkd]

@westmedsupply As @owly mentioned, can look into buying US index funds through Irish domiciled funds. 15% dividend withholding tax vs 30% if buying the same fund from US stock market directly. US doesn't allow accumulating funds (where dividends are automatically reinvested), only distributing, whilst Irish domiciled funds could.

Besides, a large part of the gains from index fund investments are most likely to come from capital appreciation instead, which is not taxable in Malaysia (unless you actively trade em, then considered as personal income).

Also, most if not all US companies have businesses all over the world, unlike businesses from most other countries, barring a few (e.g. Google vs Topglove, both have businesses worldwide, but the difference in value the businesses are able to generate is huge). Investing in US isn't just investing in the US economy, but economies all around the world as a whole. A lot of US companies (though not all) don't just have revenue sources from local markets, but worldwide. For reference, US companies' market cap as a % of the whole world is also significantly higher than most other countries, being 42.5% of the global equity market cap as of Q2 2023, 2nd biggest being EU as a whole of 11.1%, 3rd being China of 10.6%.

For some, the implicit international exposure via investing in US only might not be enough for them, thus they'd opt for a world ETF like VT.

However, I'm personally of the opinion that world ETFs only bring more risk than a pure US one (assumption being US remains relevant, competitive and ahead of competition for the foreseeable future). Other countries may not have as robust of securities law structure and market regulations than US, thus risk of market shenanigans and fraudulent businesses being higher, though US isn't immune to it as well, but I consider the risk to be lower for US businesses. When US market experiences selloffs in a significant magnitude, it's more likely than not that other countries will also be selling off, and may do so in larger magnitude than the US, as smaller cap usually correlates positively with higher volatility.

Both US focused funds and worldwide funds are good choices, just a matter of preference I suppose.

Sorry for the word salad, hope this brings a new perspective for you to take into consideration.

 

[kylievaduva123]

@westmedsupply My personal opinion, long term in US stock and etf is considerably good for me. Been doing it over 10 years and i love my us stock. But one drawback was the dividend tax was very high. Since SCHD is a dividend stock, a 30% tax cut was high considering the dividend u get from local stock might be higher in this sense.
.
I used to be all out US stock, but decided to put my eggs in different basket. Decided to increase my potfolio in local stocks partly because of high forex in usd and to even our risk by region

 

[cpossanza]

@kylievaduva123 Wouldn't going VWRA deal with the whole dividend tax issue? Slightly higher expense ratio but would be easier to manage no?

 

[kylievaduva123]

@cpossanza Yes, my opinion actually refer to schd that mentioned by OP. Dividend stock could still be favorable if one is fine with 30% withholding tax. VWRA is a good alternative too btw

 

[daughteroftheking89]

@kylievaduva123 I thought dividend supposed to be tax free. Or I think more accurately, supposed to be incurred on the company side before it is paid to its holder. US's law is different?

 

[ant101]

@daughteroftheking89 Foreign holders of stocks on NYSE get taxed 30%.

 

[eeevie]

@ant101 Is this already processed for us when we invest in Etfs like VOO?

 

[ant101]

@eeevie Yes it is withheld on the US side, meaning what you get back is already taxed.

For this reason, I am reluctant to invest in US-based stocks (30% tax), or even via the LSE (15% tax). I have put my funds into ETFs on the HKEX as those are not taxed. But of course its not equivalent to the VOO CSPX VWRA etfs so yeah, different product.

 

[phanha]

@ant101 Yes and no. As a foreign resident you can opt to have your dividends from US stocks withheld at the source with a 30% tax, or you can opt to have them taxed at your tax residence country. In the later case, you must of course, declare them to your tax authorities and pay the taxes. Being a resident of Malaysia, but being native of a European country, I could opt to declare them at my own country as income abroad, and be taxed at 23%, or be taxed in Malaysia as personal income, and pay whatever dividends are due here. A potential pitfall is that there is no double taxation agreement between the US and Malaysia (as listed in the MY tax authorities website IIRC). In my own country, there is one, so I could always opt to pay there. Not having a double taxation agreement with the US, of course you can try to pay dividends here, but unless you are a day trader, you probably won't pay dividend taxes in Malaysia.

Foreign residents in Malaysia are now thinking, that is a great way to not pay taxes on dividends, except, your own countries surely thought about the smart asses and have clauses in their tax laws that say that you will be exempt from paying taxes in your country, assuming your tax residence country is taxing you. For example, some time ago lots of professionals went to work to Saudi Arabia, Dubai, where the tax regime was immensely favourable. So much so that it was considered in my own nation, and not only, that in those situations, even though they are tax residents abroad, it's still justified to tax a percentage of their income (not all) at a specific rate. It's something related to "most favourable tax regime country", my area isn't international fiscal law.

Take it with a huge grain of salt. I know nothing, and this is most definitively not advice.

 

[mikker]

@westmedsupply Is Apple a US company or a worldwide company now?
Microsoft? Google? Tesla?

The world is globalized. You're not investing in the Afghan stock market. If the US market crashes everywhere else will follow.

 

[westmedsupply]

@mikker Yes that’s what I thought too. Most of the top US company are doing business around the world. Hence it’s kinda indirectly invest in the international market

 

[georgiew]

@westmedsupply Regarding your current asset allocation of VOO, QQQ, and SCHD, I hope you realise there is a huge amount of overlap between these 3 funds. You can consolidate everything into the VTI ETF to ensure almost 100% coverage of US stocks, unless your overweightage of QQQ and SCHD is intentional.

Depending on your investment philosophy, all-in with US can be either a good and bad idea. IMHO, an investment portfolio (as opposed to a speculative portfolio) should be optimised for risk-adjusted return and high probability of winning. Betting on the US leads you to the non-zero chance that the US market collapses and its glory days not returning for the forseable future. We don't have to look too far back into the past for a lesson on over-concentration risk. The Japan stock market was at one point 37% of the global stock market capitalisation. Today it stands at a measly 6% following the infamous lost decade. Who's to say Japan won't regain it's might and overtake US again? Who's to say the US won't face the same fate, as many other dominating stock markets once did?

So, why would you subject yourself to such a risk? Are you sure you're not just joining the bandwagon in speculating for the longevity of the US market thanks in no part due to recency bias? The US' outperformance is a relatively recent event. Comparing the US against ex-US markets, their relative performance swapped places many times in the past: https://www.hartfordfunds.com/pract...ternational-markets-have-moved-in-cycles.html Taking an average cycle of 10-years, the US is long overdue for a period of underperformance. If my portfolio is globally diversified, I take the average return at any one point in time. If my portfolio is 100% US, I will have to deal with the periods of time when the US is in a slump, and that sucks.

Arguments for US-only often don't make sense. If you're willing to narrow your investments to only US because 'ex-US is trash and are a drag on performance', what's stopping you from narrowing it further down to only the S&P 500? Why not further enhance it to only the Nasdaq-100 companies? Dammmit who cares about Wells Fargo, just go all in with FAANG. Dude Netflix is a loser, all into Apple Inc saja lah.

Diversification is the only free lunch in this world, and a globally diversified market-cap weighted equities portfolio is as close to a guaranteed eternal free lunch as it gets. Diversification protects against adverse market events.

 

[johndaniels]

@georgiew You just described VT and chill

 

[magda0316]

@westmedsupply The US market is definitely "the" benchmark to follow, but it's hard to say when (or if ever) it'll crash or change direction.

Obviously, diversifying is a good strategy, but take care to not over-diversify. Obviously, there's some overlaps with VOO or QQQ and getting VT might have additional overlap with each other.

If you want to diversify, perhaps pick another country/region and adjust/invest accordingly.

Another thing: Take some time to deep dive into the portfolio holdings of each ETF.

 

[zionpeter]

@westmedsupply As opposed to what tho. You need to find an asset class that has a low correlation to US stock market. It could be bonds, inverse etf or commodities. Just diversifying to other countries stock market might not help much since they have high correlation to US market. In simpler terms, when US gets nervous, it tends to affect other countries markets.

https://preview.redd.it/mr6oy6ulcfq...bp&s=c55406e98a56e2e10a9f5f70a228252d90f96299

 

[bolu1]

@westmedsupply OP you’ll find this forum thread interesting and hopefully it helps you decide on what you want to do going forward: https://www.bogleheads.org/forum/viewtopic.php?t=409214

I’m 31 years old this year and have decided I want to go the 100% VWRA route simply because I’m uncomfortable with the idea of putting all my eggs in one geographic basket. There have been periods in the past century where foreign markets outperform the US market, so I simply let market cap adjustments do the work for me and buy the whole basket that is the whole world. Since I’m still relatively young I’m okay with losing out on a little bit of potential upside, but some people who are more risk happy would go all in VOO QQQ etc., and that’s fine too it’s their decision.

 

[james_g]

@westmedsupply Saw an answer to this once. The entire world is highly reliant on the US markets. If the US markets fail then everything else will fail also. So you’re screwed either way. So just keep investing in the US markets. At least that can generate good returns for now

 

[mattmanticus]

@james_g Yes and no. outside of US, blue chips pay decent dividends, even if they were to crash, the dividends keep coming, it's safe to hold while waiting for recovery

 

[eagle_and_hawk]

@mattmanticus You do realize those dividends are paid out from earnings right? What do you think will happen to those earnings if things get bad enough and don't recover quickly?