Why It’s Smart for Americans to Have International Stocks in Their Portfolios — No Matter What the Market’s Doing

Why It’s Smart for Americans to Have International Stocks in Their Portfolios — No Matter What the Market’s Doing

By Steven Orlowski, CFP, CNPR

Fidelity Investments reports that the average 401(k) portfolio holds 38% of its assets in U.S. stocks and just 5% in international equities. Five percent. That’s not just unbalanced — it’s borderline financial malpractice.

The world is a big place, and the U.S. stock market — as powerful and resilient as it is — only accounts for roughly 60% of global market capitalization. That means investors who ignore international markets are willfully choosing to limit their exposure to 40% of the world’s investment opportunities. Why would anyone want to do that?

Diversification Isn’t Just a Buzzword

One of the most basic principles of smart investing is diversification: the idea that spreading your investments across different asset classes, sectors, and geographies helps reduce risk and improve returns over time. When U.S. stocks are underperforming — as they inevitably do from time to time — international markets can provide a valuable counterbalance.

For example, during the "lost decade" for U.S. equities from 2000 to 2009, the S&P 500 returned a dismal -0.95% annually. Meanwhile, international developed markets returned +1.2%, and emerging markets soared with +9.8% annual returns. Investors who diversified globally didn’t just survive — they thrived.

Different Markets, Different Drivers

Every country has its own economic cycle, monetary policy, and demographic trends. This means international stocks are often influenced by different factors than U.S. equities. Investing globally gives your portfolio exposure to growth in developing economies, technological innovation in Europe and Asia, and consumer markets that are expanding faster than anything we’re seeing stateside.

Take India, for instance — projected to be one of the fastest-growing major economies for the next decade. Or consider that companies like Nestlé, Samsung, and Toyota — massive, world-leading businesses — are based overseas and may not be fully represented in U.S.-focused funds.

Currency Exposure: A Hidden Benefit

Investing internationally also introduces currency diversification, which can act as a hedge against a declining U.S. dollar. When the dollar falls, returns from foreign investments (when converted back into dollars) can get a boost. While currency fluctuations can be a short-term risk, over the long term they can provide another layer of diversification.

Valuation Gaps Are Hard to Ignore

Many international markets are currently trading at lower price-to-earnings ratios than the U.S. — some significantly so. That doesn't mean you should jump into every cheap market you see, but it does suggest that international stocks may offer better value and higher long-term return potential than their often-overvalued U.S. counterparts.

Don’t Let Home Bias Hurt You

The tendency for investors to favor domestic companies — known as "home bias" — is natural but limiting. Imagine if a French investor only held French stocks, or if a Japanese investor ignored all companies outside of Tokyo. That would sound absurd, right? Yet that’s effectively what most Americans are doing.

The U.S. may be the world’s largest and most mature market, but no single country has a monopoly on innovation, growth, or opportunity. Avoiding international stocks is like playing poker with half the deck.

How to Add International Exposure

Getting international exposure is easier than ever. Most major brokerages and 401(k) plans offer mutual funds and ETFs that provide access to developed markets (like Europe and Japan), emerging markets (like India and Brazil), or even global funds that blend them all. Look for low-cost index funds or consider actively managed ones if you're looking for more targeted exposure.

A good starting point? Consider having at least 20–30% of your equity allocation in international stocks. That’s not aggressive — it’s just reasonable, given the size and scope of the global economy.

Final Thoughts

Investing isn't about betting on who wins next quarter. It's about building a portfolio that can withstand — and grow — through all kinds of markets. U.S. stocks will always be an important part of that picture, but they shouldn't be the whole picture.

Ignoring international investments is like closing your eyes to half the world. And in today’s interconnected economy, that’s not just shortsighted — it’s insane.