During his recent interview with Meb Faber, Eugene Fama explains why investing in the U.S has less risk than investing internationally. Here’s an excerpt from the interview:
Fama: A global market portfolio is kind of a risky venture because the problem is that countries go to war with one another. We thought we were past that, but now we’re finding out we aren’t. And wartime is subject to expropriation risks. So in other words, each side expropriates the investors of the other side, and they never get made whole after that. Everybody forgets about investors.
So, that’s the fundamental risk. In my view, the fundamental risk of international investing is if you get expropriated by the other side, those numbers never appear in the historical data. They’re just not there.
So, that risk is just put aside like it isn’t there, but it is. So, I would think that, for some reason, you may just want to hold the U.S. market portfolio.
Now, the volatility of the U.S. market portfolio of stocks is very similar to the volatility of the international market portfolio of stocks. There’s not much of a diversification effort that’s lost by doing it.
I think that’s a reasonable strategy. If you’re not concerned about the expropriation risk, you might even go into an international portfolio that held Western European, you know, common market countries.
But even within the common market, there have been periods in the past 20 years when countries wouldn’t let foreign stake their money out because they were having local problems. So, that’s always a risk with investing. It never shows up in the actual numbers.
Political risk is important. You know, you have to really take it into account. I mean, you have to really be aware because you get one guy like Putin who runs a whole country, so it all depends on what does or what the people right around him allow him to do. So you have to be very worried about that.
You can watch the entire interview here:
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