The U.S. is not the only market for your money Should you invest any of your portfolio in non-U.S. stocks or mutual funds? And, if so, why? Well might you wonder. Last weekend legendary investor Warren Buffett became the latest big name to praise the merits of America’s booming stock market — and, by implication, downplay the alternatives. “[W]ho has ever benefited during the past 238 years by betting against America?” asked Warren Buffett in his latest annual letter to shareholders. “Gains won’t come in a smooth or uninterrupted manner,” he added, “But, most assuredly, America’s best days lie ahead.” He mocked those who claimed to see better prospects overseas, noting that none of them seemed to emigrate. And Vanguard founder Jack Bogle put it even more bluntly. “I wouldn’t invest outside the U.S.,” he told Bloomberg just before Christmas. “If someone wants to invest 20 percent or less of their portfolio outside the U.S., that’s fine. I wouldn’t do it.” With comments like that, people may be wondering why they need anything in their investment portfolio than a U.S. index fund, such as Vanguard Total Stock MarketVTSMX, -1.38% Especially as the U.S. stock market is roaring and the U.S. economy has been beating its major competitors. Besides, who is going to argue with the likes of Buffett and Bogle? Alas, anyone who keeps 80% — let alone 100% — of their stock portfolio in U.S. stocks is taking a gamble — one not justified by history, math or logic. (And I’m not even talking about current valuation measures, which suggest U.S. stocks may be significantly overpriced against historical averages.) Economic and financial forecasts are generally about as useful as a cardboard battleship. But that’s precisely why it makes no sense to take a big bet on the U.S. Nobody actually knows what’s going to happen next. Far from being the “safe,” or conservative, or “neutral” strategy, holding only U.S. stocks — or even mostly U.S. stocks — is a needless risk. The U.S. certainly has grown dramatically over the decades, as Warren Buffett points out. But that doesn’t mean U.S. stocks were always the place to be. U.S. stocks badly underperformed both Europe and Japan throughout the 1970s and 1980s, according to MSCI. U.S. stocks underperformed those regions again from 2001 through early 2008. During both those periods the U.S. economy grew rapidly. Yet an investor who “bet on America” to the exclusion of rivals missed out. Indeed from 1969 through 1982 the U.S. economy expanded by 50% – yet a typical buy and hold investor in U.S. stocks, as measured by the MSCI standard U.S. stock index, lost about a third of his or her money. That’s after stripping out the effects of inflation — but before you even begin to count the costs of taxes and fees. Repeated studies have also shown that there is little or no long-term correlation between the rate of economic growth and investment returns. Back in the late 1960s, someone who wanted to invest in stable, liquid and developed stock markets around the world largely had the choice of the U.S. and Western Europe (Japan was only just emerging). Since then the U.S. and Western European economies have grown about as quickly as each other in per capita terms, says the Organization for Economic Co-operation and Development. But which was the better investment? As it happens, according to MSCI data, Europe edged the U.S. over that period. But, most interestingly, an even smarter move was simply to bet on both. Someone who put half their money in U.S. stocks and half in European stocks, and rebalanced once a year, beat both indexes by a meaningful margin. It’s a good question today whether the neutral investor should even have half of a stock portfolio in the U.S. According to the International Monetary Fund, the U.S. accounts for 22% of the world economy when measured in U.S. dollars, and still less when measured in purchasing power terms. The U.S. economy, at $18 trillion, is slightly smaller than that of the European Union. Even when you take account of America’s deeper financial markets and the global nature of its blue-chip companies, it’s hard to get to 50% — let alone 80% or 100% Today, unlike in 1970, you have an embarrassment of riches when it comes to overseas options. It’s hard to see why an allocation of, say, 1/3 U.S. stocks and 2/3 International stocks is wrong. Brett Arends