What Should Your US Allocation Really Be?

Do you have too much of your portfolio invested US stocks? In a recent piece for Advisor Perspectives, Meb Faber says that if you’re like most American investors, you probably do.

Faber says that US investors have more than 70% of their investment portfolio in US stocks, even though the US makes up less than 20% of global GDP. This “home country bias” is also observed in other countries around the world, he says.

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“A home-country bias is compounded by another unfortunate tendency that most investors exhibit: favoring market indices weighted by market capitalization,” Faber adds. Data shows that market leaders — which you’d own more of via a market-weighted index — tend to significantly lag the market average, he says.

Faber also says cap-weighted indices don’t take value into account — a huge negative. “The bad news is the U.S. stocks are expensive, although not in bubble territory,” he says. “I expect U.S. stocks to return about 4% per annum for the next 10 years.  The good news is most of the rest of the world is quite cheap.”

Faber’s recommendations: “At a minimum, allocate your portfolio globally reflecting the global market-cap weightings,” he says. “To avoid market-cap-concentration risk, consider allocating along the weightings of global GDP. … Ponder a value approach to your equity allocation. Consider overweighting the cheapest countries and avoiding the most expensive ones.” He offers tips on how to do so, and explains what that would mean for your US allocation.