Key Takeaways
- US stocks have outperformed international stocks for most of the past 15 years, which makes the case for foreign stocks feel weak. The longer record shows leadership rotating in cycles of a decade or more in each direction.
- The US is roughly 60 percent of the global stock market by value. Holding zero international is a large bet on one country continuing to win, not a neutral position.
- Most research and most major fund companies land on an international allocation of 20 to 40 percent of the stock portfolio. Where you fall in that range matters less than picking a number and holding it.
- International stocks bring different sectors, different currencies, and different valuations to the portfolio. They also bring a foreign tax credit in taxable accounts that is lost in an IRA, which affects where to hold them.
- The reason to diversify abroad is not a forecast that foreign stocks will win next. It is that nobody knows which market will lead, and owning both removes the need to guess.
If you have looked at your portfolio in the last decade and wondered why you bother with international stocks, you are not alone. US large-cap stocks, led by a handful of technology companies, have delivered returns that most foreign markets have not come close to matching. Every year the international allocation looks like dead weight, and every year the argument for dropping it gets louder. International diversification is easy to defend in theory and hard to stick with in practice.
The trouble is that the same argument would have been made in the late 1980s, when Japan dominated world markets, and in the early 2000s, when a decade of flat US returns was followed by a stretch of foreign outperformance. Leadership rotates. The question is not whether US stocks have been better lately. It is whether you can know in advance which region will be better over your remaining investing lifetime.
This guide lays out the evidence, the arguments on both sides, how much international exposure most researchers and fund companies recommend, and how to hold foreign stocks in the most tax-efficient way. It is educational and general; your own allocation depends on your goals, horizon, and tolerance for being different from the headline index.
The Case for International Diversification
The core argument is the same one that justifies owning 500 stocks instead of 5: you do not know which ones will win, so you own them all. The US is one country. It is the largest and most successful stock market in history, and it is also roughly 60 percent of the world's investable equity value, which means 40 percent of the world's public companies are somewhere else. Owning only the US means excluding the majority of companies outside it by count and a large share by value.
Diversification across countries works for a different reason than diversification across companies. Countries have different economic cycles, currencies, interest rate regimes, industry mixes, and political risks. When those differences cause markets to move somewhat independently, a combined portfolio has a smoother ride than either piece alone. Correlations between US and foreign stocks have risen over the decades, but they remain well below one, and they tend to be lowest over the long horizons that matter most.
There is also a valuation argument. After a long period of outperformance, US stocks trade at a premium to foreign stocks on most measures. That does not predict next year's return, but over ten-year periods, starting valuation has been one of the more reliable indicators of relative performance. A portfolio that holds both is positioned for either outcome.
What the Long Record Shows
Since 1970, US and international developed markets have delivered similar long-run returns, with the lead changing hands in multi-year cycles. The US led in the 1990s and again from roughly 2010 onward. International led for much of the 1980s and from 2002 to 2007. In each cycle, the trailing ten-year numbers made the laggard look permanently broken. Investors who abandoned international in 2000 or the US in 1989 were each setting themselves up to miss the reversal.
Sector and Company Differences
The US index is heavily weighted to technology and communication services. International developed markets have more financials, industrials, consumer staples, and healthcare. Emerging markets add exposure to faster-growing economies at very different price levels. A US-only investor is making a sector bet as much as a country bet, even if unintentionally.
The Case Against, Stated Fairly
The arguments for a US-only portfolio deserve a fair hearing, because some of them are correct.
- US companies already earn a large share of revenue abroad. True. Large US multinationals are global businesses. But revenue exposure is not the same as owning foreign companies at foreign valuations in foreign currencies, and the sector mix remains US-shaped.
- The US has structural advantages. Deep capital markets, strong property rights, a large domestic economy, and a culture of innovation. All true, and all largely priced in. Advantages that everyone knows about are reflected in current prices.
- Foreign stocks carry currency risk. True, and it cuts both ways. A weakening dollar boosts foreign returns for a US investor; a strengthening dollar hurts them. Over long periods currency effects have roughly washed out, and they add diversification in the meantime.
- International funds cost slightly more. Also true, though the gap has narrowed to a few hundredths of a percent for broad index funds.
- Performance has been poor. The strongest argument emotionally and the weakest analytically. Past relative performance is not a reliable guide to future relative performance, and the evidence on chasing recent winners across asset classes is not encouraging. Our piece on market timing covers that evidence.
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How Much International Stock to Own
There is no single right number, but there is a defensible range, and the major research consistently lands inside it.
The Market-Weight Argument
The neutral position is to own stocks in proportion to their global market value, which currently means roughly 60 percent US and 40 percent international. This is the allocation a global stock index fund gives you automatically. It requires no forecast and no rebalancing between regions, since the weights adjust as markets move. Some investors find 40 percent international uncomfortable, and some of the discomfort is reasonable: a US investor spends dollars, pays US taxes, and may have a home bias in career and real estate that argues for some US tilt.
What Fund Companies and Researchers Recommend
Most large fund companies set their target-date and balanced funds at 30 to 40 percent of stocks in international markets. Academic studies that model the diversification benefit typically find that most of the risk reduction is captured somewhere between 20 and 40 percent, with diminishing returns beyond that. Below 20 percent, the allocation is small enough that it barely changes portfolio behavior. Above 40 percent, an investor is tilting away from the US rather than diversifying.
A practical answer for most households is to pick a number in the 20 to 40 percent range that you can hold through a decade of underperformance, write it down, and rebalance to it. The exact figure matters far less than the commitment. An investor who holds 30 percent international for 30 years will do fine. An investor who holds 40 percent, sells it after a bad stretch, and buys back after a good one will not.
Developed vs Emerging Markets
International stocks split into developed markets (Europe, Japan, the UK, Canada, Australia) and emerging markets (China, India, Taiwan, Brazil, and others). Emerging markets are roughly a quarter of the international total by market value. They offer higher growth potential and higher volatility, with greater political and governance risk. A total international index fund holds both at market weight, which is a reasonable default. Investors who want to simplify can hold a single total international fund rather than choosing between the two.
How to Hold International Stocks Tax-Efficiently
International funds have two tax features that affect where they belong in a household portfolio.
The first is the foreign tax credit. Foreign governments withhold tax on dividends paid to US investors. In a taxable account, you can generally claim a credit for that withholding on your US return, recovering most of it. In an IRA or 401(k), the withholding is simply lost, since there is no US tax to credit it against. That makes taxable accounts the slightly better home for international stock funds, all else equal. The IRS explains the credit at irs.gov.
The second is dividend yield and qualification. International stocks tend to pay higher dividends than US stocks, and a smaller share of those dividends qualify for the preferential tax rate. That argues in the other direction, toward tax-deferred accounts. For most investors the two effects are close to a wash, and international funds can reasonably sit in either location. Our guide to asset location and tax efficiency covers the broader framework.
Choosing Funds
For most households, a single broad international index fund or ETF is enough. Look for low cost, broad coverage of both developed and emerging markets, and a large asset base for liquidity. Funds that hedge currency exposure exist but add cost and remove one of the diversification benefits; unhedged is the conventional choice for long-term investors. Investor.gov offers a plain overview of international investing risks at investor.gov.
Staying the Course Through Underperformance
The hardest part of international diversification is not choosing the allocation. It is holding it while the US wins year after year and every conversation with a colleague makes your foreign stocks sound like a mistake. A few practices help.
Judge the portfolio, not the pieces. A diversified portfolio will always contain something that is lagging. That is what diversification looks like from the inside. If nothing in the portfolio ever disappoints you, it is not diversified.
Rebalance on a rule. When US stocks run ahead, the international allocation shrinks below target, and a rebalancing rule forces you to buy more of the laggard. That feels wrong and is exactly the discipline that makes diversification pay off over cycles. Our portfolio rebalancing guide sets out how to structure the rule.
Decide in advance what would change your mind. If the answer is "another five years of US outperformance," that is performance chasing. If the answer is "a fundamental change in my goals or horizon," that is planning. Only the second is a good reason to change the allocation.
International diversification is a decision to own the world rather than to bet on one country, however successful that country has been. The evidence says leadership rotates over long cycles, that a 20 to 40 percent international allocation captures most of the benefit, and that the biggest risk is not the allocation you choose but the likelihood you abandon it at the worst moment. Pick a number, hold it in the account where it is most tax-efficient, rebalance on a rule, and expect it to feel wrong for stretches. If you would like help setting your own allocation and holding it, contact us.
Frequently Asked Questions
Why should I own international stocks if US stocks have done better?
Because past relative performance does not reliably predict future relative performance. US and international markets have traded leadership in cycles lasting a decade or more, and the US is only about 60 percent of global stock value. Owning both removes the need to guess which region will lead over your remaining investing lifetime.
How much of my stock portfolio should be international?
Most research and most major fund companies land between 20 and 40 percent of the stock allocation. Global market weight is about 40 percent. The exact number matters less than choosing one you can hold through a long stretch of underperformance and rebalancing to it consistently.
Do US companies give me enough international exposure already?
Only partly. Large US companies earn substantial revenue abroad, but you still own US-listed companies at US valuations with a US sector mix that is heavily weighted toward technology. Owning foreign companies directly adds different sectors, different currencies, and different price levels that revenue exposure alone does not provide.
Should international stocks go in my IRA or taxable account?
Either can work. In a taxable account you can claim the foreign tax credit for dividend withholding, which is lost inside an IRA. On the other hand, international funds pay higher dividends with a smaller share qualifying for preferential rates, which favors tax-deferred accounts. For most investors the two effects roughly offset.
Should I hedge the currency risk in my international funds?
Most long-term investors do not. Currency movements add diversification and have roughly washed out over long periods, and hedged funds cost more. Hedging can make sense for shorter horizons or for investors who find currency swings unbearable, but it is not the default choice.
Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, physicians, and business owners. Advisory services are held to a fiduciary standard. More about Attend
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