US stocks have dominated global markets for the past 15 years. It's tempting to conclude that international diversification is unnecessary. That American exceptionalism extends to stock returns. But that's recency bias talking. The case for global diversification is about humility, not prediction.
The US Dominance Decade
Since 2010, US stocks have crushed international markets. The S&P 500 has returned roughly 13% annually, while international developed markets returned about 6%. Emerging markets have been even worse.
Why? US tech giants (Apple, Microsoft, Google, Amazon, Meta, Nvidia) have led a historic run. The dollar has strengthened. The US economy recovered faster from 2008. American companies dominate growth industries.
Given this, why bother with international stocks?
The Case for International Diversification
1. Leadership Rotates
US dominance isn't permanent. From 2000-2009, international stocks outperformed US stocks by about 3% annually. In the 1970s and 1980s, Japanese stocks dramatically outperformed. Every era has a leader, and that leadership eventually changes.
Historical perspective:
• 1970s: International outperformed US
• 1980s: Japan and international led
• 1990s: US dominated (tech boom)
• 2000s: International outperformed
• 2010s-2020s: US dominated
• 2030s: ???
2. Valuations Matter
US stocks are expensive by historical standards. The S&P 500 trades at elevated price-to-earnings ratios, while international stocks trade at significant discounts. Expensive stocks tend to deliver lower future returns.
3. True Diversification
Even if US stocks continue to lead, international diversification reduces portfolio volatility. Different economies face different conditions. When US markets struggle, some international markets may hold up better.
4. Currency Diversification
Owning international assets provides implicit currency diversification. If the dollar weakens (as it eventually will), international holdings benefit from currency tailwinds.
🛠️ Recommended Tool
Portfolio Visualizer lets you backtest different US/international allocations over various time periods. See how a 70/30 US/international split would have performed vs. 100% US.
How Much International Exposure?
There's no objectively "right" answer, but here are common approaches:
Market Cap Weighting: ~40% International
Global market cap is roughly 60% US, 40% international. A total world stock fund reflects this. This is the "own the whole world" approach.
Moderate Allocation: 20-30% International
Many advisors and target-date funds settle here. It provides meaningful diversification without fully committing to international parity.
Home Country Bias: 10-20% International
Some investors prefer minimal international exposure due to currency risk, political uncertainty, and the global revenue of US multinationals.
Zero International
A minority view, but some argue that US companies already have global operations, providing implicit international exposure. This is a high-conviction bet on continued US dominance.
What About Emerging Markets?
Emerging markets (China, India, Brazil, etc.) offer higher growth potential but also higher risk: political instability, currency volatility, governance concerns.
Typical allocations:
- Within international: 25-30% emerging, 70-75% developed
- Of total portfolio: 5-12% emerging markets
A total international fund (like VXUS) already includes emerging markets at roughly their market cap weight.
📚 Further Reading
The Bogleheads' Guide to Investing covers international diversification with a practical, evidence-based approach, helping you decide what allocation makes sense for your situation.
The US Multinational Argument
A common counterargument: "S&P 500 companies get 40%+ of revenue from overseas. I'm already diversified globally."
The rebuttal:
- Revenue diversification isn't the same as stock diversification
- US multinationals still trade on US exchanges, subject to US sentiment
- You miss locally-focused companies that may outperform
- Currency effects differ between owning foreign assets vs. US companies with foreign revenue
The argument has some merit. You're not completely undiversified with 100% US. But it's not equivalent to owning international stocks directly.
Practical Implementation
Simple approach: Hold a total US stock fund (VTI or similar) and a total international fund (VXUS or similar) at your chosen ratio.
All-in-one approach: A total world fund (VT) holds both US and international at market cap weights (~60/40). One fund, fully diversified.
Considerations:
- International funds often have slightly higher expense ratios
- Foreign tax credits can offset taxes on international dividends (in taxable accounts)
- Rebalancing between US and international provides some "buy low" opportunities
The Behavioral Challenge
The hardest part of international investing is sticking with it during long periods of underperformance. The past 15 years have tested investors' patience. Many have abandoned international exposure, often at the worst time.
The solution: set an allocation you can stick with through thick and thin. If 40% international makes you anxious when it underperforms for years, choose a lower allocation. Consistency matters more than optimization.
The Zen Take
International diversification is an insurance policy, not a return enhancer. You're not holding international stocks because you expect them to beat US stocks. You're holding them because you don't know which will win.
The honest answer to "Should I own international stocks?" is "I don't know what the future holds, and neither do you." Diversification is humility made tangible.
Pick an allocation between 20-40% international, implement it simply with low-cost index funds, and don't second-guess yourself based on recent performance. The whole point is owning assets whose future you can't predict. That's uncomfortable, and exactly right.