One of the mantras of an index fund investor is that you can’t predict which companies or which economies will do best. (Or at least you can’t predict better than other investors, so obviously promising stocks are already priced high to reflect that promise.) Therefore, you should try to invest in a way that mirrors the domestic economy or, if you expect to spend time in other countries, the world economy.
Let’s have a look at the Vanguard all-US fund (“Total Stock Market”) “total returns” (reflects reinvestment of dividends, but not taxes).
12.17 percent return over 10 years. After federal taxes, this is 10.1 percent, says Vanguard. They don’t estimate the effect of state income taxes, but with California at at 13.3 percent on the successful, this could fall to less than 9 percent for a Californian.
How about the Vanguard all-foreign fund (“Total International”)?
In an efficient market, the returns should have been about the same. But the investor enthusiastic about broadening his/her/zir/their investment base got destroyed. The 10-year total return on non-US stocks, in U.S. dollars, has been 4.68 percent. After federal taxes? 3.88 percent. After California state taxes? Perhaps around 3.5 percent. Foreign bonds would have paid better than foreign stocks, I think.
Inflation targeting being equal everywhere, capital allocation still tends to be more efficient in US, despite all the bad news. Losing all manufacturing & most software jobs 20 years ago obviously was a good idea. All those incompetent indian call center employees pressing random buttons for Comcast are obviously good enough. Insurance companies requiring home owners to rebuild their own houses every 15 years to keep their policies is good for stonks.
So, an “efficient market” only requires that securities reflect all available information, not that they all generate the same same returns. Lion has hit upon one of the reasons U.S. returns are often higher vs. other countries. U.S. companies tend to be more focused on capitalism/shareholder returns (hence better revenue growth, margins, cash flow etc.) and don’t face the same “socialism” constraints as in many countries (e.g. many in Europe)…though that may be changing! To summarize, when you are investing in U.S. stocks, you are “fishing” in a superior pond.
That markets are efficient presumably explains the differential (the causes of stock prices are not observable so we can only speculate), that the companies on offer in the US markets are superior, more profitable, better allocators of capital, etc., that the US corporate governance and regulatory systems are superior, the strength of USD as against foreign currencies in recent years. Sounds like Phil does not understand the concept of efficient markets.
What an investor cannot do is to accurately predict which investment will be better a foreign or domestic one. If you artificially split the domestic market into two (A and B) using some arbitrary criteria, an investor could not predict the best performing stocks within each set (A or B) and could not be expected to predict if “index set A” will outperform “index set B.”