Why not invest in US stocks?

Longday

Lots of literature about investment returns and "sustainable withdrawal rates" is based on US market data often using the S&P 500 or US value or small caps. UK investors are advised to expect lower returns fron UK indexes. All based on historical performance of course and who knows what returns will be in future. But rather than plan for and accept lower returns why can a UK investor not have a global tracker fund and another alocation to the S&P or other US equities to add a heavy weighting of US stocks if historically they tend to out perform the UK and mist other markets over the longterm?

edinburgher

Why can't they? You're welcome to invest wherever and however you like!

I think the reason that so many funds/model portfolios are overweight in UK stocks may largely be explained by the risk of currency fluctuations (unless you are able to hedge against these).

My pension is something like 90% in equities, 70% of which are invested overseas.

jamiehelsinki

Surely with the £ so weak against the $, it would be a bad time to invest in the US. It would probably be a good time to sell US investments though,if your converting back to £.

edinburgher

Jamiehelsinki wrote: »

Surely with the £ so weak against the $, it would be a bad time to invest in the US. It would probably be a good time to sell US investments though,if your converting back to £.

Do you have a crystal ball that lets you know when/if the pound will strengthen against the dollar? I don't, so it doesn't affect my investing decisions.

Longday

Why (as in a good reason, not "home bias") bother with UK index funds at all?

Longday

If currency is the issue, over the longterm surely USD is just as safe a place as GBP to hold investments.

Also if you dont know if you may decide to retire outside the UK then GBP may be no more or less relevant to potential spending power than USD if you end up spending in AUD or EUR or whatever.

dunstonh

UK investors are advised to expect lower returns fron UK indexes.

advised by whom?

UK investors tend to be multi-asset with sector allocation. Unlike US investors who generally are more home biased.

But rather than plan for and accept lower returns why can a UK investor not have a global tracker fund and another alocation to the S&P or other US equities to add a heavy weighting of US stocks if historically they tend to out perform the UK and mist other markets over the longterm?

Why not stick with what most UK investors do and remain multi-asset rather than breaking asset allocation models that are tried and tested?

Longday

dunstonh wrote: »

advised by whom?

UK investors tend to be multi-asset with sector allocation. Unlike US investors who generally are more home biased.



Why not stick with what most UK investors do and remain multi-asset rather than breaking asset allocation models that are tried and tested?

Instead of 'advised' then perhaps 'suggested'? When I said UK investors are advised to expect lower returns from UK stocks than US stocks I did not mean advised in the sense of advised by an IFA, but published research by, for example Schroders, Morningstar etc.

It is often suggested that when assuming realistic future stock market returns and sustainable withdrawal rates, UK investors should plan for about 1% lower returns and 1% lower sustainable withdrawal rates than those quoted in US based research. The reason given is that the research uses returns based on historical performance experienced by US investors on US stocks. The comparable returns for UK investors on UK stocks over almost all periods has been lower. Global equities would also have been lower.

"Why not stick with what most UK investors do and remain multi-asset rather than breaking asset allocation models that are tried and tested?" If the models are tried and tested, are their projected returns equal to the projected returns of US investors portfolios? Are the projected sustainable withdrawal rates equal to those for US portfolios? If not then why and why use these allocations?

Past performance is no guarantee of future performance. But if US retirees are happy to have a home bias and fill their portfolios with mainly US allocations, and on that basis (often along with their IFA) reasonably plan for higher returns over the longterm than a UK bias or global portfolio, why should investors outside the US not do the same?

dunstonh

It is often suggested that when assuming realistic future stock market returns and sustainable withdrawal rates, UK investors should plan for about 1% lower returns and 1% lower sustainable withdrawal rates than those quoted in US based research. The reason given is that the research uses returns based on historical performance experienced by US investors on US stocks. The comparable returns for UK investors on UK stocks over almost all periods has been lower. Global equities would also have been lower.

Too simplistic. The UK has gone through devaluation over 100 years that the US has not. The FTSE100 is a dire index. The FTSE 250 is very good by comparison.

The US was an emerging market in the 20th century. It is not any more. So, 20th century data is not really useful for the future.

Taxation in the US also favours US holdings. Not an issue for UK investors.

ut if US retirees are happy to have a home bias and fill their portfolios with mainly US allocations, and on that basis (often along with their IFA) reasonably plan for higher returns over the longterm than a UK bias or global portfolio, why should investors outside the US not do the same?

US doesnt have IFAs. The US still operates mostly with sales reps. Indeed, there are campaigns in the US to bring in higher standards similar to those in the UK. However, putting that to one side, home bias exists because of the marketplace they have. Not because it is right. The average US investor just isn't wired to understand there is a world outside of the US.

The US really hasnt had to worry about currency fluctuations. You would if you invested in the US. The recent fall in sterling saw UK investors with US holdings benefit heavily. However, when Sterling begins it's long climb back, US investments held by UK investors will get the exchange rate drag.

A lot of the asset allocation models for UK investors have now started reducing the US allocation a bit. Asia and emerging markets taking an increased allocation.

Longday

Interesting points thank you.

Was the US an emerging market for the whole of the 20th Century? By the end of the 19th Century the US overtook the UK in manufacturing and it was the worlds largest economy throughout the 20th Century.

However, emerging market or not, for whatever reasons your point suggests that the US figures for equities returns and retirement planning withdrawal rates are not appropriate for US investors either, as future US equity returns are expected to be lower than current research is based on.

Are you saying that for your money the expectation is that in the future, an equities allocation to globally diversified stocks (including the US) and Emerging Markets will match the returns of a US equities heavy portfolio?

Thrugelmir

In 2015, 20% of purchase activity in the US market was companies buying their own shares back. Sometimes things aren't what they seem.