Table of Contents
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.
The Case for International Stocks (Even When the U.S. Is “Winning”)
It’s easy to assume the last decade will look like the next decade, especially when U.S. stocks have been doing the heavy lifting. But that’s exactly why international exposure tends to get ignored at the wrong time and embraced at the wrong time.
Cycles rotate, valuations matter, and leadership changes when you least expect it. If you already own a diversified portfolio, international isn’t an “extra” sleeve. It’s part of the basic structure that keeps you from betting your whole retirement plan on one country staying on top forever.
International stocks are having a moment, a brief but long-overdue moment anxiously awaited by investors.
How to Implement International Exposure Without Overcomplicating It
You don’t need a globe-spanning fund menu to do this well. Pick a diversified developed-markets ETF, add a dedicated emerging-markets ETF, and decide on a target percentage you can stick with. Then rebalance occasionally and move on with your life.
The biggest risk here isn’t choosing the “wrong” ETF. It’s abandoning the allocation after a bad stretch or performance-chasing after a good one. Keep it simple, keep it low-cost, and keep it consistent. That’s how diversification actually works in the real world.
Frequently Asked Questions
1) Why invest in international stocks if the S&P 500 has been outperforming?
Because markets move in cycles, and leadership changes over time. A long stretch of U.S. outperformance can make diversification feel unnecessary, but that’s usually when it’s most valuable. International stocks can provide exposure to different economies, sectors, currencies, and valuation environments. They can also reduce reliance on a concentrated group of U.S. mega-cap names. The goal isn’t to beat the U.S. every year. It’s to build a portfolio that can hold up across different market regimes and surprises.
2) What’s a reasonable international allocation for most investors?
A common starting point is around 40%, which roughly reflects the international weight of a global benchmark like the MSCI ACWI. You can go higher if you believe valuations and mean reversion will favor international over time, or lower if you have strong reasons and can stick with them. I’d generally view anything under 30% as light because it starts to look more like a token allocation than real diversification. Whatever percentage you choose, the key is consistency across cycles.
3) Should I use one total international fund, or split developed and emerging markets?
Either can work, but splitting developed and emerging gives you more control. Developed markets tend to be less volatile, while emerging markets can swing more but may offer higher growth potential. With two funds, you can rebalance more precisely, tax-loss harvest one sleeve without touching the other, or add money to a segment that’s lagging. Total international funds are simpler, but you should look under the hood to confirm the developed and emerging mix matches what you actually want.
4) Are active international funds worth considering?
Sometimes. International markets can be less efficient than the U.S., which can create opportunities for skilled active managers to add value. The problem is that identifying a truly good manager in advance is difficult, and fees can eat into returns. That’s why active management usually isn’t the default choice for most investors. If you have access to a strong option in a retirement plan, or you’ve vetted a manager with a clear process and reasonable costs, it may be worth a look. Otherwise, diversified ETFs are fine.
5) What are the biggest mistakes people make with international investing?
The biggest one is performance chasing. People add international after it’s already outperformed, then cut it after a rough stretch. Another mistake is under-allocating (like 5 to 10%) and expecting it to meaningfully diversify the portfolio. Investors also forget to check what a fund actually owns, assuming the name tells the full story. And some people overcomplicate it with too many regional bets. The simple approach, broad exposure, low costs, and periodic rebalancing, beats most clever strategies over time.
