Why US stocks still matter
- Robin Powell
- Mar 11, 2024
- 4 min read
US stocks dominate global equity markets, making up roughly 60% of total market capitalisation. For investors looking to build a diversified portfolio, that makes the United States hard to ignore. Yet some are put off by the heavy concentration of the S&P 500 in large tech firms — especially the so-called Magnificent Seven.
In this interview, author and wealth manager Ben Carlson explains why US exposure remains crucial, despite those concerns. Historically, a small number of companies have delivered the bulk of long-term stock market gains — and index funds naturally capture those winners without requiring investors to guess in advance who they’ll be.
Carlson also touches on the challenge of timing the market, particularly around recessions. Although downturns in the US are inevitable, trying to predict them — and adjust your portfolio accordingly — is rarely a winning strategy. What matters more is having a robust, long-term plan that can withstand volatility when it comes.
Long-term investors have repeatedly been rewarded for staying the course in US stocks. Of course, global diversification is key, but US equities warrant a place in every portfolio.
Key takeaways
1. US stocks are essential for global diversification
Given the US market's substantial size, representing around 60% of global stock markets, including US stocks in your portfolio is crucial for achieving broad global diversification and avoiding home country bias.
2. Indexing is the best strategy
There are concerns about the S&P 500 being dominated by a few large companies (like the "Magnificent Seven". But, historically, market gains have usually been driven by a small number of stocks. Index funds naturally capture the returns of these winning companies as they grow.
3. Downturns require preparation, not timing
Market downturns and recessions are a normal and unavoidable part of investing in the US. Attempting to time when these happen is extremely difficult. It’s better to build a durable portfolio and have a plan to navigate these periods rather than trying to predict or avoid them.
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Transcript
Robin Powell: For equity investors, being globally diversified is critical.
It reduces risk, and, in the long run, it should lead to higher returns.
There’s one market in particular that every investor should have exposure to — and that’s the United States.
Ben Carlson is a blogger, author and wealth manager.
Ben Carlson: If you look at the global market cap, the U.S. makes up roughly 60 percent of global stock markets, and that's increased a lot. And so if you want to have a well diversified portfolio and not have some sort of home country bias, I think owning U. S. stocks makes sense. And I think diversifying internationally is the same reason that the U. S.
investors should diversify internationally. There are going to be times when even the most dominant market fails to hold up its end of the bargain . In the 19 by the late 1980s, Japan made up more than 40 percent of global stock markets and underperformed by a wide, wide margin since then. But you had all these other countries like the U S and like other countries in Europe and Asia that did much better and more than made up for those losses in Japan.
So I think one of the reasons is that you diversify globally. And geographically is because you don't want to be stuck investing in a single country, a handful of countries that underperform while you have all the others, these other ones doing well.
RP: Something that puts many people off investing in the US is that the S&P 500 is dominated by large technology firms — especially the so-called Magnificent Seven.
But should investors be worried about being too heavily concentrated in a small number of stocks?
BC: If you look at the history of the U. S. stock market, the big winners like that, the biggest companies tend to have outsized impact on the index itself.
And that's actually one of the benefits of indexing is it's a small handful of stocks that make up the majority of the long term gains. So Hendrik Bessenbinder did this study a few years ago where he looked at where all the gains come from over the past 100 years or so. And the majority of the games came from like 4 percent of the companies.
Right. It was a tiny amount. At first blush, you'd say, well, that's fine. I'll just avoid the losers and try to pick the winners, which obviously would be great. If, if, if anyone could do that with consistency, the problem is picking those winners ahead of time is very difficult. And the great thing about index funds is that those winners tend to rise up and they more than offset the losers
RP: As Ben Carlson says, even the US falls out of favour with investors from time to time, particularly during recessions.
But accurately timing the start and end of a recession is very challenging.
BC: You have to build these downturns into your financial and investment plan. Of course, again, you can't hope that it'll never happen.
You know, they're going to happen at some point. A recession in the U.S. for the past hundred years has happened once every, you know, five or six years. So it's, it's going to happen. The point is that you make your portfolio durable enough to handle those periods and have a plan of attack on how to handle it, as opposed to trying to guess when it's going to happen all the time and jump in and jump out.
And the thing is, even if you knew the exact timing of the recession, I've looked at this data in the past. It might not help you with your investment portfolio because a lot of times the stock market will fall before the recession starts and bottom before it's over.
RP: There are bound to be periods when it doesn’t pay off, but, historically, long-term investors in US stocks have generally been well rewarded.
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