Ben Felix - International Diversification

Short Summary

Main recommendation: Hold a globally diversified equity portfolio that includes international stocks rather than a U.S.-only portfolio, since no one can reliably predict which countries will outperform. Ben Felix argues that international diversification is theoretically sound under Markowitz and CAPM frameworks and has held up empirically, especially for long-horizon investors.

Key Points

• Markowitz's 1952 "Portfolio Selection" showed that diversifying across imperfectly correlated assets can raise expected return without more risk, or cut risk without lowering expected return, which Markowitz called the only free lunch in investing.
• Sharpe's 1964 CAPM implies the market portfolio is mean-variance optimal, so excluding international stocks is suboptimal from this theoretical view.
• U.S. outperformance versus the rest of the world (about 2% per year over 100+ years) is attributed by Cliff Asness's "The Long Run is Lying to You" largely to rising U.S. valuations (1980-2020 period specifically), while a separate 2022 paper attributes the longer-run ~2%/year excess to a roughly equal mix of luck and learning; after adjusting for valuations, the 1980–2020 outperformance was about 0.4% per year (versus about 2% per year unadjusted).
• Rising short-term correlations do not eliminate long-horizon benefits: the 2018 paper finds that increasing correlations are mainly driven by discount rate shocks (not cash flow shocks), and discount rate shock correlation does not reduce diversification benefits for long-horizon investors, whereas cash flow shock correlation would.
• International stocks have outperformed in sub-periods, and U.S. stocks beat the rest of the world only 59% of the time across 10-year rolling periods from 1900 to 2022.

Details Worth Noting

• Concrete instructions: The video gives no step-by-step allocation, percentages, or product names. The actionable advice is to hold broad global diversification across countries rather than only U.S. stocks, and to avoid concentrating in past top performers such as the U.S. market, because high current valuations are a hurdle for future returns.
• Owning U.S. multinationals is not an effective substitute for international diversification: their stocks tend to move closely with their domestic index, and adding international equities to a domestic index improves efficiency more.
• Diversifying across countries within an industry reduces risk more effectively than diversifying across industries within one country.
• A 2022 bootstrap study of 38 developed markets from 1890 to 2019 found a 13% chance of losing purchasing power in domestic stocks at a 30-year horizon, versus about 4% for international stocks.
• Large-cap growth stocks are more correlated across countries than small-cap value stocks, so international value and small-cap value may offer additional portfolio improvements beyond international market indexes.
• Caveat: The video is Canadian-perspective, uses historical data, and is not professional advice.

Bottom Line

Global diversification remains the most sensible default for most investors because future market leaders cannot be identified in advance, and the long-horizon evidence supports holding international stocks alongside domestic ones.