S&P 500

NoviceInvestor1

adindas said:

NoviceInvestor1 said:

With the US making up 60% + of a global tracker, what is the reason to buy a US index over a global one?

Why concentrate a bet on a single country?

Many of big companies on S&P500 nowadays, especialy tech companies are actually global companies. Their revenues are not just from the US but from all over the world.

That’s fine, but when a market becomes unpopular a market becomes unpopular. 

The US had global companies for the many years the US has underperformed. The FTSE100 has many global companies that derive revenue globally, but the UK has been unpopular for years. Etc etc. 

The global index is top heavy with US firms so I don’t know why someone would want all that single country concentration, as well as extra currency risk. 

adindas

NoviceInvestor1 said:

adindas said:

NoviceInvestor1 said:

With the US making up 60% + of a global tracker, what is the reason to buy a US index over a global one?

Why concentrate a bet on a single country?

Many of big companies on S&P500 nowadays, especialy tech companies are actually global companies. Their revenues are not just from the US but from all over the world.

That’s fine, but when a market becomes unpopular a market becomes unpopular. 

The US had global companies for the many years the US has underperformed. The FTSE100 has many global companies that derive revenue globally, but the UK has been unpopular for years. Etc etc. 

The global index is top heavy with US firms so I don’t know why someone would want all that single country concentration, as well as extra currency risk.

Because in every single company listed in the stock exchange what is matter is the earning that they report every quarter. When they miss earning followed by lower earning guidance, they will get punished by the market.

When their revenue stream come from  around the world, their earning are not just effected by the US economy, US market. Think about these companies top 10 of S&P 500 holdings in 2021
    Apple (NASDAQ:AAPL)
    Microsoft (NASDAQ:MSFT)
    Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG)
    Amazon (NASDAQ:AMZN)
    Tesla (NASDAQ:TSLA)
    Meta Platforms (NASDAQ:FB)
    Nvidia (NASDAQ:NVDA)
    Berkshire Hathaway Class B (NYSE:BRK.B)
    Tesla (NASDAQ:TSLA)
    UnitedHealth Group (NYSE:UNH)
    JPMorgan Chase (NYSE:JPM)

They generate revenue stream from all over the world

Example Alphabets, In terms of geographic regions, for the fiscal year 2021, Google earns about 46% of its total revenue or $117.8 billion from the US, but the other 54% come from other countries such as the EMEA region (Europe, the Middle East, & Africa) with 31% or $79 billion, the APAC (Asia-Pacific) contributes 18% or $46 billion and 5% or $14 billion from Canada and Latin America (termed as “Other Americas”).

NoviceInvestor1

Earnings is one part of what drives stock market returns, valuations is another.

As we've seen on many occasions, single markets or whole markets can get carried away with irrational exuberance and extreme valuations which then correct.

The US had a decade of pretty much zero returns previously, the US at that time also had many companies who derived their earnings internationally. So did Japan when it had a multi year period of zero returns.

Index constituents deriving earnings internationally rather than domestically does not protect an investor from a decade of zero returns due to valuation compression, or from poor returns due to currency fluctuations.

As above a market can become unpopular for many years and an investor betting on a single market is far higher risk than an investor diversifying their investment across many markets.

adindas

NoviceInvestor1 said:

Earnings is one part of what drives stock market returns, valuations is another.

As we've seen on many occasions, single markets or whole markets can get carried away with irrational exuberance and extreme valuations which then correct.

The US had a decade of pretty much zero returns previously, the US at that time also had many companies who derived their earnings internationally. So did Japan when it had a multi year period of zero returns.

Index constituents deriving earnings internationally rather than domestically does not protect an investor from a decade of zero returns due to valuation compression, or from poor returns due to currency fluctuations.

As above a market can become unpopular for many years and an investor betting on a single market is far higher risk than an investor diversifying their investment across many markets.

I am not quite sure whether you could see that valuation are highly effected by Earning.

Generally speaking, it is calculated using DCF which is based on earning.

When the majority of revenue which will be translated to become earning coming global outside the US. Their valuation is not just effected by the US economy but by global economy in which their revenue  stream  is coming from.

You can not compare Japan Index such as Nikkei with S&P500.  Just look at the nature of the companies in those indices.

You are talking about the era before the fourth industrial revolution the period before global dependency in their  form, before companies in the S&P500 turn to become where they are now.

With the current global interconnection when the US stock market down it will bring the whole stock market around the world down.

NoviceInvestor1

adindas said:

NoviceInvestor1 said:

Earnings is one part of what drives stock market returns, valuations is another.

As we've seen on many occasions, single markets or whole markets can get carried away with irrational exuberance and extreme valuations which then correct.

The US had a decade of pretty much zero returns previously, the US at that time also had many companies who derived their earnings internationally. So did Japan when it had a multi year period of zero returns.

Index constituents deriving earnings internationally rather than domestically does not protect an investor from a decade of zero returns due to valuation compression, or from poor returns due to currency fluctuations.

As above a market can become unpopular for many years and an investor betting on a single market is far higher risk than an investor diversifying their investment across many markets.

I am not quite sure whether you could see that valuation are highly effected by Earning.

It is calculated using DCF which is based on earning.

When the majority of revenue which will be translated to become earning coming other than the US. Their valuation is not just effected by the US economy but by global economy in which their revenue  stream  is coming from.

You can not compare Japan Index such as Nikkei with S&P500.  Just look at the nature of the companies in those indices.

Valuations are definitely not always directly correlated to earnings - if they were stock market bubbles wouldn't ever happen. Tesla share price has dropped by 50% this year, their earnings haven't dropped 50%.......

Japan's stock market derives 45% of it's revenue from overseas; https://www.morningstar.co.uk/uk/news/225694/asian-markets-are-globalising.aspx

S&P 500 derives 29% of revenue from overseas; https://www.cnbc.com/2022/07/11/prepare-for-the-us-dollar-hit-on-sp-500-big-tech-earnings.html

As such using your logic around where revenues come from, why not just go all in on Japan seeing more revenue is derived from overseas?

My point remains - a bet on a single country stock market is far higher risk than simply buying a diverse global index. 

adindas

NoviceInvestor1 said:

Valuations are definitely not always directly correlated to earnings - if they were stock market bubbles wouldn't ever happen. Tesla share price has dropped by 50% this year, their earnings haven't dropped 50%.......

You are talking about three different things, The stock price, valuation, earning.

It is a general wisdom that the valuation does not necessary directly correlate with the stock price. In the market there is what is the so called exuberance. This is where the contrarian are using their edge.

But the value of an investment is estimated using DCF which is based on the company expected cash flow mainly coming from revenue.

Japan's stock market derives 45% of it's revenue from overseas; https://www.morningstar.co.uk/uk/news/225694/asian-markets-are-globalising.aspx

S&P 500 derives 29% of revenue from overseas; https://www.cnbc.com/2022/07/11/prepare-for-the-us-dollar-hit-on-sp-500-big-tech-earnings.html

As such using your logic around where revenues come from, why not just go all in on Japan seeing more revenue is derived from overseas?

It is not logical. As you are comparing the company like Toyota. Nissan with Alphabets, Microsoft, Amazon, Apple, etc. Also you are comparing the US economy with Japanese economy. The start of the fourth industrial revolution future which is just started around 2016 with more global dependency, the boundary among countries become less relevant are a game changer.

NoviceInvestor1 said:

My point remains - a bet on a single country stock market is far higher risk  *riskier" than simply buying a diverse global index.

Risk correlate with return. A single country portfolio is definitely riskier than a global index. It is  the same thing with stating the obvious that saving is less riskier than investing.

Also I never said that a single country portfolio is less riskier than global tracker. But avoiding the risk is not necessary the best strategy out-there if the aim is for wealth creation rather than a wealth preservation. It applies to every single aspect in human life.

Albermarle

Millyonare said:

The renewed strength in the UK pound (GBP) has wiped out almost all S&P 500 gains since its low in Sep-Oct 2022 (unless you hedged it).

To put a figure on that, a hedged US index fund, will be up around 10% on the October low.

Linton

The argument that as the US large cmpanies operate throughout the world an S&P500 tracker is equivalent to a global one I think is missing a key point.

In terms of sector allocation different countries differ greatly. In this particular example Tech allocation is important. Despite the recent downturnt the S&P500 is currently at about 23% tech and 2.2% basic materials (miners&drillers) .  Compare this say with the FTSE100 at 0.72% Tech and 10.7% basic materials or the L&G European index fund at 8.7% Tech and 6.4% Basic Materials. So the different country indexes are essentially proxies for different asset allocations.

People like the US because it has performed well since the 2008 crash thanks to Tech.   Investing in the S&P500 this is a punt on a specific active decision - to overweight tech compared with global indexes which is surely not what a index investor would want to do.  The downside of not investing as broadly as one might uhas been seen in the recent equity downturn which is largely tech driven.

NoviceInvestor1

But avoiding the risk is not necessary the best strategy out-there if the aim is for wealth creation rather than a wealth preservation.

I agree with this, but taking unnecessary risks by chasing past performance destroys wealth for many an investor.

The main reason I can see as to why someone may bet on the US only versus a more diverse portfolio is because performance in the past 10 years has been better.

As we've seen in many market cycles over many decades, the things that lead the market for one period are extremely unlikely to be the same for the next. 

From say 2000 - 2010 anyone buying US Large Cap Growth will have done horrendously badly, whilst those buying Emerging Markets Small Cap Value would have done very well. Fast forward a decade and the opposite applies.

History leads me to believe that the chance of the same factors (growth/quality), countries (US), individual stocks (FAANGs) continuing to drive market returns for multiple decade cycles is extremely low.

As much as certain US stocks have benefited from multiple expansion to aid returns over the past few years, the opposite is as likely (if not more likely) to occur with multiples contracting - as we have seen this year and will continue to see if certain macro factors remain/if companies with infinite growth priced in continue to disappoint on earnings.

Currency movements may also be a headwind for a UK investor buying US equities right now, something which has been a tailwind for several years but again may reverse.

adindas

NoviceInvestor1 said:

But avoiding the risk is not necessary the best strategy out-there if the aim is for wealth creation rather than a wealth preservation.

I agree with this, but taking unnecessary risks by chasing past performance destroys wealth for many an investor.

It is only a person who does not have a common sense at the slightest will ever do that. This sort of person should stay on saving and should never be getting involved in investing in the first instance until they understand the risk involve as investing will always get involved some degree of risk.

You take the risk for an overwhelming potential reward you might get. Not where the risk are similar to the reward you will be getting. Also it will depend on the probability that risk will hit you.

Although it is very distance there is always a probability that comrade Putin will use his nuke to hit Europe and at that time we might not need to talk about investing any longer, do we ??