Is Investing Only in US Stocks Risky?

This past holiday, I happened to come across a podcast from NPR — an economics segment hosted by Darian Woods and Adrian Ma, discussing “What are the pros and cons of investing only in the U.S.?” — a timely topic given the 2024 bull market.

The podcast also features Dan Villalon, a director at AQR Capital Management, who shares his view on investing in the US market.

Key takeaway

Market Context

US stocks grew significantly in 2024, posting record outperformance over a 15-year span. Corporate earnings in the market were strong, but concentrated mostly in tech companies. There are also concerns about the US government deficit being used to stimulate the economy.

US stock valuations

US stocks are now trading above their fundamental value. Take Amazon (AMZN), for example — its price rose from $150 to $230 over the past year. Even if you believe Amazon can keep growing profits for another 10 years, it’s already priced expensively, and buying in now won’t get you the same value as before — which means we need to revisit the idea of diversification.

The phrase “don’t put all your eggs in one basket” — in investing terms — means spreading assets across many industries and countries. Suppose we invest in both the US and Japanese markets: if the US market goes into a recession one day, returns from the US portion will fall, but we still benefit from the Japanese market, so our money isn’t all at risk at once.

So if a market delivers very strong returns, can we just say “higher risk, higher reward”?

In truth, that’s exactly how markets work — investing in riskier industries or riskier countries means a higher chance of loss, but also a higher chance of greater returns if things go well. Diversification lets us capture good returns while staying safer at the same time.

Another point many people lose sight of when it comes to diversification is the fear of “missing the boat,” or FOMO (Fear of Missing Out) — seeing one group of stocks outperform and wanting in, to the point of abandoning diversification altogether. This has been obvious with US stocks over the past year — they’re now expensive, while stocks in other countries have gotten far less attention but could deliver good returns over the next 5-10 years. The best approach is to diversify across many countries to find good-value stocks at reasonable prices, managing risk on every front.

Source: https://www.npr.org/2025/01/16/nx-s1-5215927/what-are-the-pros-and-cons-of-investing-only-in-the-u-s