Buying UK over US stocks made a lot of sense when I first started investing many moons ago. With the benefit of experience, however, I no longer think this was prudent.
Let me explain.
Home bias
The lure of UK shares isn’t hard to fathom.
Naturally, familiarity plays a part. While some company research is clearly still required, it’s psychologically easier to buy what one knows. We shop at Tesco every week; our phone contract is with Vodafone; we buy petrol from the BP station; we have a current account with Lloyds Bank.
Another thing to like about the UK market is that it tends to be a wonderful hunting ground for dividend stocks.
Although this income can’t be guaranteed, the idea of earning extra cash from simply holding shares is very appealing. This is particularly the case for those entering (or already in) retirement.
Still, I now think there are a few really good reasons for looking across the pond from the off.
Safety in numbers
First, there’s the diversification it brings.
As much as some like to think that the UK is an economic powerhouse, the reality is a little different. Some may blame Brexit; others the Bank of England. Some may blame both or neither.
In the end, it’s pretty irrelevant, especially when you check on the performance of the respective indexes. The domestically-focused FTSE 250 index is down almost 3% in 2023, as I type. In sharp contrast, the S&P 500 is up almost 17%.
Now, don’t get me wrong: there are many high-quality companies listed on these shores. Personal favourites that I actually own include fantasy figurine maker Games Workshop and sausage roll seller Greggs. Of those I don’t (directly, at least), premium spirit juggernaut Diageo always appeals.
But let’s be real: the performance of the aforementioned S&P 500 shows that not having US stocks in my portfolio, even if only via a bog standard exchange-traded fund, could be costly.
High-growth US stocks
Second, investing in the US gives me exposure to sectors that the UK is lacking.
For example, you probably don’t need me to tell you just how rich some investors have become by backing tech titans such as Apple, Amazon, and Tesla.
Sure there have been wobbles along the way. Last year was a particularly nasty one. However, 2023 has seen a big recovery (and then some) in all of the above.
Sticking purely to the UK market would have prevented me from riding this momentum.
Buyer beware
Sure, investing in US stocks is far from a free ride. Just as I can become too overweight in home shares, I can easily get too dependent on Uncle Sam for gains.
Knowing that a huge proportion of the S&P 500’s 17% gain this year is down to only a few companies is also pretty sobering.
As someone with quite a bit of exposure to US stocks via funds — both passive and active — I must be aware that some of these gains could be lost.
Looking ahead, generally lower valuations also mean that UK stocks could thrive in the months and years ahead.
We simply don’t know.
But personally, I sleep easier knowing a proportion of my cash is invested overseas.
