Mebisode – What If You Owned No US Stocks? | #504

Episode Summary

Executive Summary: In this episode, host Meb Faber explores the idea of building wealth without owning any US stocks by analyzing a non-US stock allocation that delivered near-identical risk-adjusted returns since 1972. He compares a global market portfolio with and without US stocks, finding only a minor return disadvantage. The key insight is that mindset and behavior—such as forced saving through a mortgage—matter more than specific asset allocation. He also suggests that active strategies like trend or value could further enhance returns.

Main Topics: US Stocks vs. Non-US Stock Allocation (Priority: 5/5): Comparison of a 100% US stock portfolio vs. a diversified portfolio excluding US stocks (including REITs, ex-US stocks, corporate bonds, foreign bonds, gold). Both showed nearly identical returns, volatility, and drawdowns since 1972. Global Market Portfolio With vs. Without US Stocks (Priority: 4/5): Analysis of the global market portfolio (all assets) with and without US stocks. The difference in annual return was only about 0.3% (1972-2022) and 0.5% (1926-2022), with similar risk metrics. Mindset and Behavioral Finance (Priority: 4/5): The host argues that the specific assets owned matter less than the mindset of being an owner. He uses the example of a mortgage as a forced savings mechanism that prevents spending. Taxes, Fees, and Behavioral Costs (Priority: 3/5): Emphasizes that taxes, expense ratios, and behavioral errors have a greater impact on long-term returns than precise asset allocation percentages. Active Management and Factor Tilts (Priority: 3/5): Briefly mentions that strategies like trend following, value, or momentum could historically produce portfolios with higher returns and lower risk compared to a US-only stock portfolio.

Key Arguments: A diversified portfolio with zero US stocks can achieve similar long-term returns and risk characteristics as a 100% US stock portfolio. The global market portfolio without US stocks had only a 0.3% annual return disadvantage since 1972, with nearly identical volatility and drawdowns. Behavioral factors (e.g., forced saving from a mortgage) and costs (taxes, fees) are more critical than specific asset allocation. Active management or factor tilts can potentially improve on passive buy-and-hold returns, even without US stocks.

Data Points: US Stocks Annual Return: 10.2% - 1972-2022 period Non-US Stock Portfolio Annual Return: 10.2% - 1972-2022 period, identical to US stocks Global Market Portfolio Return (with US stocks): 9.07% - 1972-2022 Global Market Portfolio Return (no US stocks): 8.68% - 1972-2022, 0.39% lower Global Market Portfolio Return (with US stocks, 1926-2022): 7.69% - Longer period Global Market Portfolio Return (no US stocks, 1926-2022): 7.11% - 0.58% lower US Stock Market Share of Global Total: 60% - Largest globally, 10x Japan (#2) Volatility, Sharpe, Sortino, Max Drawdown, Positive Months: Near identical - Comparing US stocks vs. non-US allocation

Pivotal Quotes: "What if you could build wealth without owning any US stocks? Blasphemy!" — Meb Faber: Introducing the provocative central question of the episode "My point is, it really doesn't matter so much what you specifically own as the mindset of being the owner." — Meb Faber: Summarizing the behavioral insight after presenting the data "My belief has always been that things like taxes and expense ratios and fees will be more important than the exact percentages of what you own. Don't get me started on things like behavioral problems." — Meb Faber: Emphasizing the overriding importance of costs and behavior over allocation

Implications: Investors should not obsess over US vs. non-US allocation; a globally diversified portfolio with no US stocks can be equally effective. Focus on costs, taxes, and behavioral discipline. Active strategies (trend, value) may further improve outcomes. The takeaway: ownership mindset and avoiding harmful behaviors matter most.