International stocks: why diversify globally?

A recurring debate: should you hold international stocks, or just own the US market? US stocks have crushed international for most of the last 15 years, and many investors have concluded they can safely skip international altogether. The math and history disagree.

The case against skipping international

• The US is about 25% of global GDP and historically 60% of global market cap. Owning only US means ignoring half the world's investable companies.
• Recent decades of US outperformance are an outlier, not a rule. From 2000 to 2010, international beat the US. From 1970 to 1990, international beat the US. The leadership rotates.
• Home country bias is a documented behavioral error. Japanese investors in the 1990s thought the same way about Japan, right before a 20-year bear market.
• Valuations matter long-term. US stocks have been expensive for years; international has been cheap. Long-term returns usually reflect starting valuations.

The case for holding less international

• Many US companies already have significant international revenue (Apple, Microsoft, Coca-Cola). Some say you're already globally diversified by owning them.
• Currency risk: international returns in USD include exchange rate movements, which add volatility.
• US markets are more liquid, more transparent, and more shareholder-friendly than many foreign markets.

The recency trap: why this debate feels settled but is not

Anyone who started investing after 2009 has only ever seen US stocks win, and it colors the entire conversation. From 2010 through 2024, the S&P 500 returned roughly 13% annually while international developed markets returned about 6% — a gap so wide that holding VXUS felt like a tax on patriotism. But zoom out one decade and the picture inverts: from 2000 through 2009, the S&P 500 produced a total return of roughly negative 9% (the 'lost decade') while emerging markets more than doubled and international developed stocks eked out gains. From 1970 to 1989, international beat the US as well. Leadership has rotated in long, multi-decade waves for as long as records exist, and nothing in finance says the current US wave is permanent. The honest statement is not 'US wins' but 'US has won recently, and recency is exactly the bias that ruins investors.'

How much is enough? The practical ranges

Global market capitalization currently puts the US at roughly 60 to 65% of world stock value, so a pure market-weight investor holds 35 to 40% of stocks internationally — this is what a total world fund like VT does automatically. Vanguard's research suggests most of the diversification benefit arrives by the time international reaches 20% of your stock allocation, with diminishing improvement beyond 40%. That gives a defensible range: 20% at the conservative end, 40% at market weight. What sits outside the defensible range are the two extremes — zero, which is a concentrated bet that one country outperforms forever, and constant tinkering, where investors add international after it outperforms and cut it after it lags, reliably buying high and selling low. Pick a number inside the range, write it down, and let it bore you for thirty years.

Common objections, answered honestly

• 'US companies already earn 40% of revenue abroad.' True, but revenue exposure is not the same as owning foreign markets — US multinationals still move with US valuations, the dollar, and US tax policy. The 2000s proved global revenue did not save US-only portfolios.
• 'International has higher fees and taxes.' Mildly true: VXUS costs 0.05% versus 0.03% for VTI, and foreign withholding taxes shave a bit — but a partial foreign tax credit in taxable accounts recovers much of it. The total drag is hundredths of a percent, not a reason to skip a continent.
• 'Buffett says just buy the S&P 500.' He does — while Vanguard, Fidelity, and virtually every target-date fund on earth hold 30 to 40% international. When the world's largest asset managers all diversify globally with their default products, that is the stronger signal.
• 'Currency swings add risk.' Over short periods yes; over decades currency effects have largely washed out, and unhedged foreign exposure actually diversifies a portfolio whose liabilities are all in dollars.

Implementation: one decision, one fund

Once you have picked a percentage, execution is a single purchase. A total international fund — VXUS, FTIHX, or SWISX — covers developed and emerging markets, large and small companies, in one ticker for about 0.05 to 0.06% a year. There is no need to separately manage Europe, Japan, and emerging market slices; that is complexity without benefit for an individual investor. Alternatively, a total world fund like VT (0.06%) holds the entire globe at market weight and removes the decision permanently — you will never rebalance between US and international again because the fund does it continuously. Target-date funds do the same thing inside retirement accounts, typically holding 30 to 40% of stocks internationally. Whichever route you choose, the goal is identical: make the international allocation a standing decision you wrote down once, not a monthly referendum on which region feels like a winner.

The bottom line: international diversification is not a bet that foreign markets will beat the US — it is an admission that nobody knows which market wins the next thirty years, priced at a few hundredths of a percent. Somewhere between 20% and 40% of your stock allocation, held permanently and rebalanced mechanically, captures nearly all of the benefit.

However you land, make the choice deliberately and once — the worst allocation is the one that changes every time a different region tops the annual performance chart.