Americans love American stocks. They should look overseas

“Iknow theussp allocation models don’t say this,” admitted Steven Mnuchin, a treasury secretary turned private-equity investor, last month, “but if I had to put money to invest for the next ten years I’d put 100% of it in the economy.” Although Mr Mnuchin’s patriotism may be in part ideological—for he is both an investor and a political creature—he is not alone. According to Morningstar Direct, a data firm, American fund investors hold just a sixth of their equity allocation overseas. Jack Bogle, who invented index funds, called international exposure an overcomplication. Warren Buffett, an investor, thinks his wife should allocate 90% of her wealth to the & 500, America’s leading index, and 10% to Treasuries after his demise.This patriotism is an oddity. After all, Mr Mnuchin is right: it is not what asset-allocation models suggest. Diversification is perhaps the most important idea in modern finance. Its power was shown in the 1950s by Harry Markowitz, an economist who died on June 22nd. At the time, portfolio theory suggested investing in whichever stock held the highest present value of future dividends. Mr Markowitz realised such analysis ignored risk. Andy’s farm might return 10% a year on average, but with wild swings. Barry the bootmaker posts a steady 7% a year. So long as the firms’ fortunes are not in sync, a portfolio with a little of Andy and a little of Barry will offer better risk-adjusted returns than one holding shares in either firm.