When it comes to investing, the allure of global diversification is strong. Investors often hear about the benefits of spreading their money across different international markets to mitigate risk and capitalize on growth opportunities. However, you might be surprised to learn that when you invest in the largest U.S. companies, particularly through an S&P 500 index fund, you’re already tapping into significant global exposure.
In fact, the largest U.S. companies generate over 40% of their revenue from international markets. This means that by simply buying an S&P 500 index fund, you’re indirectly investing in the global economy. This built-in diversification can provide a substantial cushion against domestic market downturns while still keeping your investment strategy straightforward and cost-effective.
Now, this isn’t to say that investing directly in international stocks is unnecessary. Holding about 20% of your portfolio in an international index fund—such as VTIAX, FZILX, or SWISX—can enhance your diversification even further. These funds give you direct exposure to foreign markets and can help balance out your portfolio.
The debate between investing solely in U.S. stocks versus adding international stocks is ongoing. Good investors can have different opinions on the matter. However, understanding the significant international exposure you get from U.S. companies can help you feel more comfortable with a simpler investment strategy. For many, sticking with a Total Stock Market or S&P 500 index fund is a practical approach. It avoids the complexities and often higher costs associated with international investments while still offering substantial diversification benefits.
