International Investing

American investors have a massive home bias. Studies show that U.S. investors hold about 80% of their equity portfolio in domestic stocks, even though the U.S. represents only about 60% of global market capitalization. For the past decade, this home bias has been rewarded — U.S. stocks have crushed international stocks. But history shows that leadership rotates. The U.S. won't always be on top. And the cost of ignoring international markets can be severe.

Why International Diversification Matters

Leadership Rotates

From 2000 to 2009, international stocks outperformed U.S. stocks by a wide margin. Emerging markets returned over 150% during that decade while the S&P 500 returned roughly -9%. Then from 2010 to 2024, U.S. stocks dominated. This leadership rotation has happened repeatedly throughout market history.

No country permanently dominates. The U.K. was the world's dominant economy in the 1800s. Japan was ascendant in the 1980s. The U.S. has led recently. But betting your entire portfolio on one country's continued dominance is a concentrated bet that history suggests will eventually hurt.

Valuations Differ

As of recent years, U.S. stocks trade at significantly higher valuations (P/E ratios of 25-30x) compared to international developed markets (15-18x) and emerging markets (12-15x). Higher starting valuations have historically correlated with lower future returns. International stocks, being cheaper, may offer better forward returns — though there's no guarantee.

Currency Diversification

Holding only U.S. assets means your entire wealth is denominated in U.S. dollars. If the dollar weakens (as it periodically does), international assets denominated in foreign currencies gain value in dollar terms. This provides a natural hedge.

How to Invest Internationally

International developed markets include Europe (U.K., Germany, France, Switzerland), Japan, Australia, and Canada. These are stable, well-regulated markets with companies like Nestl, Toyota, Samsung, and Novo Nordisk.

Emerging markets include China, India, Brazil, Taiwan, South Korea, and South Africa. These economies grow faster but carry more political risk, currency risk, and regulatory uncertainty.

The simplest approach:

• Vanguard FTSE All-World ex-US (VXUS): Covers both developed and emerging markets outside the U.S. One fund, 8,000+ stocks, 0.07% expense ratio.
• iShares Core MSCI International (IXUS): Similar broad international coverage.

For investors who want to separate developed and emerging:

• Developed markets: Vanguard FTSE Developed Markets (VEA) or iShares MSCI EAFE (EFA)
• Emerging markets: Vanguard FTSE Emerging Markets (VWO) or iShares Core MSCI Emerging Markets (IEMG)

How Much to Allocate

There's no universal answer, but common frameworks include:

Market-weight approach: Match the global market capitalization. U.S. stocks are about 60% of global market cap, so allocate 60% domestic and 40% international. This is the most theoretically sound approach.

Modified approach: Many U.S. advisors suggest 60-70% U.S. and 30-40% international, overweighting the U.S. slightly for home bias, tax efficiency, and the fact that many U.S. multinationals already generate significant overseas revenue.

Minimum diversification: Even a 20% international allocation provides meaningful diversification benefits. Going below 20% is probably too concentrated in one country.

The Bogleheads debate: Jack Bogle himself famously argued against international investing, saying U.S. multinationals provide sufficient global exposure. However, the majority of financial academics and practitioners disagree — owning international stocks provides diversification benefits that U.S. multinationals alone don't fully replicate.

The Risks of International Investing

Currency risk. When the dollar strengthens, international returns are reduced in dollar terms (and vice versa). Over long periods, currency effects tend to wash out, but in shorter periods they can significantly impact returns.

Political and regulatory risk. International markets — especially emerging markets — face risks that U.S. investors don't worry about: government intervention, nationalization, capital controls, sanctions, and political instability.

Higher costs. International funds have slightly higher expense ratios than domestic equivalents. Foreign tax withholding on dividends adds another cost, though the Foreign Tax Credit partially offsets this for U.S. investors.

Accounting differences. Not all countries have the same accounting standards as the U.S. This can make financial analysis more challenging and introduces risk that reported numbers may not be fully comparable.

The Tax Benefit

There's an often-overlooked tax advantage to international investing. Many countries withhold taxes on dividends paid to foreign investors. U.S. investors can claim a Foreign Tax Credit on their U.S. tax return, effectively recovering most of these withholding taxes. This credit is most valuable when international funds are held in taxable accounts (not tax-deferred retirement accounts, where the credit is lost).