Facebook Reader Question: Why Do We Only Recommend U.S. Index Funds, Not Global Indexes or Emerging Markets?

Facebook reader question: [Why do we only recommend investing in U.S. index funds, and not global indexes or emerging countries?] Easy Investment Chat CLEC Investment Channel. Post date: June 10, 2020

Reply:

What we pursue in investing is return. In particular, my own investment philosophy is to find investment targets among many products that have relatively high, stable long-term returns. In my past 30 years of investment experience, U.S. broad-company index funds QQQ and SPY are still the best investment targets. They do not turn bad over long-term investing.

During the 2008 subprime crisis, emerging countries and commodities had relatively high gains at that time, but the gains happened over a short period. This is the feature of emerging countries and commodities: they surge and crash. After emerging countries and commodities fall, they usually need a very long time to consolidate at the bottom. Emerging countries and commodities have been consolidating for more than 10 years so far.

In the future, emerging countries and commodities may suddenly have an explosive period. But investing is not investing in fireworks-style targets. We also cannot know when this firework will launch and burst. Spending a very long time and opportunity cost for brief beauty is not worth it for investing.

Investing in U.S. index funds sometimes also has bubbles, but bubbles usually end within two years because we know the recovery power of the entire United States is very strong. Emerging countries and commodities do not have self-recovery ability. They need time and changes in the external world environment before they can slowly improve themselves with help from the international economic environment.

In the global economic industrial chain, the United States is actually the locomotive. It is the force pulling global economic growth, so the United States usually recovers from bubbles earliest, rises first, and lasts the longest.

Next is the second carriage, including Japan, Europe, South Korea, Taiwan, Hong Kong, Singapore, and other capital-intensive high-end manufacturing countries and regions.

Then China is in the third carriage. China's current position is very special because its industries include too much manufacturing, so it cannot yet have high-end capital-intensive industries like other Asian countries. China is currently alone in the third carriage. After several transformations, China may have a chance to enter the second carriage.

Finally, the fourth carriage is commodity countries such as Brazil, Australia, Russia, Canada, and others.

Countries in the earlier carriages have economies with stronger self-recovery ability and relatively higher stock-market returns. The later carriages are closer to fireworks-like economies, meaning the tail end of the global economic chain. During a market bubble phase, they only show the final bit of fireworks.

Since we know the United States is the locomotive of the world, at least under current conditions, and I do not see major short-term changes, why should we give up a high-return investment target and put capital into inefficient emerging countries?

Below, I compare U.S. index funds QQQ and SPY with emerging markets EEM, China FXI, Taiwan EWT, the global index VT, and MSCI commodities UCI over two periods. U.S. indexes have still withstood long-term testing and performed relatively better.

This is why I only recommend U.S. technology funds. Long-term investment in U.S. index funds means profiting along with the high growth created by America's industrial and technological creativity.