Baseball is almost back and even if we can’t visit Great American Ballpark it’ll be nice to be able to finally watch it at home or listen to it on the radio. The Last Dance documentary kept us occupied for a little while but nothing says Summer like Reds baseball. Sports might be a trivial thing right now, and COVID certainly isn’t over just because baseball is back, but it sure helps to take your mind off it, even if just for a little bit.
If you’re like me, you tend to get a little get choked up at baseball games, especially during the Star-Spangled Banner or when the 80-something year old veteran is honored and gets two standing ovations. Baseball has been America’s favorite pastime for over 150 years, and patriotic rituals such as these have been around just almost as long.
Patriotism doesn’t just exist at baseball games or on the Fourth of July, it can exist in our portfolios too. Often when we meet with prospective clients who have been portfolio DIYers, we find that they are heavily invested in US stock with little exposure to the rest of the world. Often, it’s the large companies with great brand recognition that make their way into these portfolios; think Coca-Cola, FAANG stocks, Microsoft.
It’s completely understandable why this home bias exists. It can feel disloyal to invest our hard-earned dollars into companies that aren’t close to home. I myself try to be mindful and look for American brands when I’m shopping but realize that there are things I want or need that aren’t always made in the US.
Lack of country diversification in a portfolio can create unnecessary risks, like increased volatility. You wouldn’t want to invest everything you have in a single stock for the same reason you wouldn’t want to your entire stock portfolio in a single country. Putting all your eggs in one basket eliminates the possibility of a plan b when things go awry. Spreading risk out among many countries increases your odds of investment success and makes the ride less bumpy along the way.
Consider the chart below. If you follow the S&P 500 all the way across, you’ll see it was only the best performing index once in the last fifteen years. It was the second-best performer three times and fell below that rank the remaining eleven years. If you perform that same exercise with the other indexes listed, you’ll find that you get similar results, no one index wins consecutively year over year.
If you look at a globally diversified index, you can see country diversification at work. Going back to 1970 the S&P 500 performed better than the globally diversified index 20 times, it performed worse 29 times. Similar to the last chart, if you follow the globally diversified index all the way across, and then follow the S&P all the way across you’ll see the returns for the globally diversified index are clustered closer together, while the S&P returns send you on a wild ride up and down, creating a whiplash-like effect.
It’s difficult to remove emotion from investing. We see emotions play out in the stock market all the time, and the loyalty we have for our country can be an emotional factor when it comes to choosing our investments. Being patriotic and investing globally are not two mutually exclusive ideas, patriotism can still exist in our hearts and not overrun our stock portfolio. In fact, we’d be better off if it didn’t.
In US dollars. Source: S&P and Dow Jones data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Dimensional Index data compiled by Dimensional. MSCI data © 2020, all rights reserved. ICE BofA index data © 2020 ICE Data Indices, LLC. Bloomberg Barclays data provided by Bloomberg. FTSE fixed income indices © 2020 FTSE Fixed Income LLC. All rights reserved. See “Index Descriptions” in the appendix for descriptions of Dimensional’s index data. Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Their performance does not reflect expenses associated with the management of an actual portfolio. In US dollars. These indices are the current components of the Dimensional Equity Balanced Strategy Index as of 1994–present. Sources: Dimensional for Dimensional Index data. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. See Appendix for Descriptions of Dimensional Indices. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate risk of market loss.