International stocks are having a moment – a brief, but long overdue moment anxiously awaited by investors. Historically, U.S. and international stocks have taken turns outperforming, and you’ve benefited from owning both.
However, the U.S.’s decade plus outperformance left investors questioning diversification (I covered the reasons why the U.S. did so much better earlier this year).
It also brought my career full circle. I started in 2001. Two bear markets and a lost decade left investors clamoring for alternative investments, bonds, and international stocks (anything but the S&P 500). Fast-forward to 2024 and all anyone wanted was the S&P 500.
But I digress.
Global diversification makes sense. See the chart above, right?
Also, investors usually have a home country bias, which is a poor way to allocate money. The global stock market is roughly 65% U.S., 25% developed international, and 10% emerging markets as measured by a popular global stock benchmark, the MSCI ACWI. To capitalize on global growth you need that diversification.
You’d also benefit from cheaper valuations internationally as the ACWI ex U.S.’s P/E ratio is 13.7 compared to 21.5 for the S&P 500. You’d diversify away from the Mag 7 (35% of the S&P 500). And you’d have protection against an economic or market downturn here.
How Much to Invest in International Stocks
35% is a good starting point since that’s mirrors the MSCI ACWI. You could overweight diversified international a bit at the expense of the U.S. or emerging markets. The U.S. is more expensive, and the emerging markets are more volatile.
The global stock market used to be 50/50 U.S. vs. international, so there’s room to add more than 35% now if you believe in the bounce back potential, or like cheaper valuations. I’d consider anything less than 25% light.
What International Stocks to Invest In
Active managers have added value in the less efficient international markets. However, picking a good active manager is hard and not likely to be your default solution. I mention it in case you have that skill, are in a retirement plan with good active solutions, or working with someone recommending one.
For everyone else, stick with low-cost and diversified ETF’s. Look for one focused on developed international and another on the emerging markets. There are international ETF’s that combine both in a total solution, which is okay. Dig deeper than the name to make sure they own developed international and emerging markets in the percentages you want. I prefer to split it into two funds versus using total solutions in case I need to rebalance, tax-loss sell, or add money to one segment and not the other.
