Investment legends Jack Bogle and Warren Buffet have a few things in common: They embrace low fees and index investing, and millions of people look to them for investing wisdom. One other thing: When it comes to investing, both are homebodies.
Bogle dismisses international diversification. Buffett, meanwhile, says an index fund portfolio of 90 percent S&P 500 and 10 percent Treasurys is probably good enough for most investors — that's how he is recommending his wife invest. But the anti-international stance is the rare piece of investment advice over which many people dare to disagree with Bogle and Buffett.
"I would tend to disagree," said Omar Aguilar, chief investment officer of equities for Charles Schwab Investment Management, who hews to the basic idea that the more diversification, the better. "Maybe I am not a great investing mind!" he added with a laugh.
Bogle and Buffett don't cast this advice as stone-cold or research-driven. In fact, both say it is more a preference and perhaps geared for investors who need to keep it simple rather than those who want to generate the absolute highest returns for the lowest risk. Diversification is crucial for long-term investors because it tamps down risk, and Nobel Prize-winning science says the more, the better — if you don't pay too much for it.
The crux of the case for not worrying about international diversification has always been that the multinationals that make up the S&P 500 generate a signification portion of their revenue from international markets. Holding an S&P index fund, where multinationals like Coca-Cola or Google are generating plenty of money from international sales, is a sort of shortcut to international diversification. Because an S&P 500 index fund is one of the cheapest investments around in terms of fees — the expense ratio on those funds is often under 0.1 percent — it's also a cheap way to diversify internationally.
But is that enough in a changing world? If you've been relying on the S&P to capture much of the globe's economic growth as you can over the long term, it could be time to rethink, say a growing number of experts and evidence.
The long-term fundamentals in international markets, especially in emerging markets, look good. Growing middle-class populations in Africa, Latin America, the Middle East and Asia are likely to propel some markets — most likely those with sound governance — to greater annual GDP growth than the United States.
After the eight-year run-up in U.S. stocks, international developed and emerging markets look like relative bargains and are currently among the world's hottest trades.