…but (likely) not compensate for that, given that the U.S. currently makes up for 1.5 times the rest of the entire world in that index. And it’s not as if non-U.S. markets will grow because of the U.S. economy faltering (that is, substituting for the U.S. economy in the world index).
If you believe that - or at least want to limit the risk of it - I suggest you underweight the U.S. in your portfolio (below its share in common “world” indices and index funds, such as VT).
That said, Europe doesn’t seem in the greatest shape either, due to the energy crisis/rising energy prices, does it? So what your alternatives? Japan, Australia, China or the developing markets?
You could just cap US equities and keep market weighting the rest. The same approach is seen in other funds that would have very high allocations in one category otherwise. E.g. many funds on the SMI cap Nestle even though Nestle surely is a quite diversified company. But Nestle has certain idiosyncratic risks, which the market probably does not compensate for, since you can diversify.
The US economy is even more diversified, but it too has single points of failure, that you could diversify from. E.g. I’m not sure how many more years of Trump era craziness the institutions in the US can take before warping into something else or descending into civil war. This change will probably not be beneficial to US companies (disproportionally so) and their foreign shareholders.
Sure. The bet is that someone would rise up to fill the void let by the US stock market and that that growth would then compensate for the previous loss over time.
A collapse of the US dollar would not happen in a vacuum, another mean of exchange would have to be used. Given the current state of things, I consider it likely for it to be another state emitted currency, though some may want to make a case for gold or some kind of cryptocurrency. I trust the country benefiting from than newly acquired status of having a predominant reserve currency to use that advantage to grow their economy, or rather, the two would probably grow in pair and the country(ies) selected would already have a growing economy ready to challenge the US.
That’s the whole Ray Dalio thesis of the changing world order, anyway. I find it convincing, though it is a slow process and we may not live to see the fall of the USD as a reserve currency. Unless they choose to default, in which case, the fight between would be reserve currencies could get more agitated right away.
Well, the shares of countries will of course always add up to 100%. Someone will take up their (percentage) share of the pie.
But the overall size of the pie is neither fixed - nor guaranteed to be maintained by someone else.
Imagine an alternate history in which some unknown effect had ravaged the United Kingdom in the 18th century. Could have been large-scale social unrest, a war, infectious disease or a natural disaster.
Would the world have seen the same industrial revolution that originated in England during that time? Would you say „Yeah, some other country surely would’ve come up with it as well“? I‘m not sure - don’t think it would have been a given.
Or, as a more concrete and contemporary example: Imagine you‘re highly invested in the semiconductor and software industry. And then the mother of all earthquakes gets unleashed on Northern California, killing half of the population of the world’s Silicon Valley.
Will some other country - or even state in the U.S. - just rise and pick up the slack that industry? Maybe never, probably eventually - but it would likely take many years to decades. In the meantime, you‘d be better off by not having invested 60% in that sector.
Will other industries, say building materials and construction directly benefit? Yes - I don’t think other economic sectors could just replace that market cap. But the replacement likely won’t be 1:1.
Not every country and its respective economy can do what a fail or decline of the U.S. can do.
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