International Stocks

International stocks are widely considered a part of a well-diversified portfolio. An international stock index fund can be found in just about any target date retirement fund. There are strong arguments for both the inclusion and exclusion of international stocks in an American investor’s portfolio. I will explore both.

Exclusion

From 1970-2024, the annualized return was 10.69% for U.S. stocks and 8.95% for international stocks. A CAGR difference of 1.74% is large over 55 years. In addition, the US market has outperformed in 28 of 36 (78%) rolling 20-year periods from 1970-2024.

The past does not predict the future, but America has many structural advantages, and I don’t see any other country meeting the requirements necessary to have businesses that are more profitable than American businesses moving forward. Europe is heavily regulated with socialist leanings, China is run by a communist regime, and many countries around the world lack the necessary rule of law and political stability for businesses to thrive.

America has the following structural advantages: world reserve currency, the world’s largest and strongest economy, deep capital markets, rule of law, the strongest property rights, entrepreneurial culture, scale/profitability of companies, capitalism, federalism, independent judiciary, unmatched national defense, the highest-quality legal and corporate governance, and the most shareholder-friendly system.

The primary argument for international stocks is diversification, but the diversification benefit is minimal. In our global economy, international stocks are now highly correlated with US stocks (correlation is approximately 0.84), and correlation tends to increase in a crisis, which is when you most need low correlation. In addition, the largest US companies are global businesses that earn roughly 40% of their revenue from overseas. The US is the headquarters, not the geography of the revenue. Owning the largest US businesses exposes an investor to global consumers, global economic cycles, global currencies, and global supply chains. Also, the United States has large businesses operating in every industry.

International investing exposes an American investor to currency risk. Foreign stocks are typically traded in their local currency. This means that U.S. dollars have to be converted to the foreign currency to invest, then back to dollars. As exchange rates fluctuate, this impacts the return. Fluctuations in exchange rates can impact your returns positively (if the foreign currency appreciates relative to the dollar) or negatively (if the foreign currency depreciates relative to the dollar). So, even if international stocks slightly outperform US stocks, exchange rates can turn this into underperformance for the American investor.

Lastly, two great investing minds—Warren Buffett and John Bogle—always recommended an all-US portfolio for American investors. Even experts can be wrong, but their words are at least worth considering. Below are quotes from them. Also worth noting is that Warren Buffett’s estate plan has his wife’s inheritance going 90% to an S&P 500 index fund and 10% to US Treasuries (no international stocks).

“Never bet against America.”

“The American tailwind has been and will continue to be unstoppable.”

“Most investors should just buy a cross-section of U.S. businesses.”

Warren Buffett

“We Americans earn our money in dollars, spend it in dollars, save it in dollars, and invest it in dollars; so why take currency risk? Haven’t US institutions been generally stronger than those of other nations? Don’t half of the revenues and profits of US corporations already come from outside the United States? Isn’t US GDP likely to grow at least as fast as the GDP of the rest of the developed world—perhaps at an even higher rate?”

“International investing involves extra risk, ranging from currency risk and economic risk to societal instability risk. The reality is that we do better than the rest of the world.”

“International adds complexity and volatility without a commensurate increase in return.”

“I don’t think you need to include international stocks in your portfolio.”

John Bogle

Inclusion

While US stocks have had the highest CAGR over long periods of time, shorter time periods have been a coin toss. From 1970-2024, the US has only outperformed in 52% of rolling 10-year periods and 51% of 1-year periods. In addition, US stocks have had a 10-year period of negative returns, while international stocks have not. For someone looking to achieve financial independence in a decade or less, there is risk in being 100% US.

No country remains on top forever and unexpected things happen all the time. Countries fall from dominance for reasons that were not obvious in earlier years. International exposure is more about risk reduction than it is a return bet. Japanese stocks dominated the 1980s, peaked at the end of 1989, crashed, then took 34 years to recover. This would be detrimental to your wealth if it happened to the US stock market and you were invested 100% in US stocks. It’s unlikely, but what if. The risk of international exposure is a small opportunity cost while the risk of all-US exposure is a catastrophic tail event; this is an asymmetric decision.

“Risk is what’s left over when you think you’ve thought of everything.”

Morgan Housel

Valuations (e.g., P/E ratio) are another argument for international exposure. Returns are determined by three things: starting dividend yield, earnings growth, and changes in valuation. Even if US businesses are more profitable and grow earnings better, international stocks can outperform due to valuation changes. By all accounts, US stocks are historically expensive while international stocks are inexpensive at the time of this writing. This could be setting up a cycle of international outperformance. (Note that this argument for inclusion is not an evergreen argument; it is true at the time of this writing but may not be true in the future when someone is reading this.)

Lastly, reversion to the mean. This is a theory in finance that asset returns tend to naturally move back to their historical average over time. This means that a period of higher-than-normal returns tends to be followed by a period of lower-than-normal returns, bringing returns back to normal. The long-term historical average annual return of US stocks is about 10%. In the 15-year period from 2010-2024, US stocks returned about 14% annually. This could mean that US stocks are currently (in 2025) poised to provide a period of lower-than-normal returns. (Note that this argument for inclusion is not an evergreen argument; it is true at the time of this writing but may not be true in the future when someone is reading this.)

Conclusion

There are strong arguments for both sides of this topic. The only right answer is in hindsight. Ultimately, you have to decide for yourself what you think gives you the highest probability of success and what helps you sleep best at night. And, most importantly, you have to do what you will be able to stick with long term.

If you decide you want international exposure, I recommend using one of the two ways listed below to achieve it.

Option 1: Allocation Control, VTI + VXUS

Use VTI as your US exposure and VXUS as your international exposure. This method allows you to control the weight you want to each market. If you go this way, I recommend a weighting of 80% VTI and 20% VXUS.

Option 2: The Global Portfolio, VT

VT is a total world index fund. You won’t be able to determine the weight between US and international exposure, but you also won’t ever have to think about it. The fund sets the weight based on market cap. It currently sits at roughly 60% US and 40% international. This allows you to invest 100% of your money in one fund, VT, and gain US and international exposure.

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