When you talk about the stock market, it’s a safe bet that you’re primarily thinking about U.S. stocks. There is a natural home bias in investing, meaning we tend to gravitate toward the companies we know, the brands we see every day, and the market that feels closest to home.
Lately, that bias has felt entirely justified. The U.S. stock market has been dominant for the better part of the last dozen years, significantly outperforming international markets. When you see those numbers, it is completely reasonable to ask: Why should I invest anywhere else?
It’s a question I hear often. The answer ultimately comes down to one of the most fundamental principles of investing: diversification. While the U.S. stock market is by far the largest in the world, it still accounts for just over half of global trade. If you limit yourself strictly to U.S. stocks, you are essentially reducing your opportunity set by half.
Building a portfolio designed to help you live your most meaningful life requires investments that do not all move in lockstep. Here is why international exposure remains a critical component of a well-constructed financial plan.
Established vs. Emerging Markets
When diversifying internationally, we are generally looking at two categories: established markets and emerging markets.
Established markets include countries like Japan and the U.K. — stable, well-developed economies that behave much like large-cap U.S. companies. They tend to be reliable, with less volatility and fewer dramatic price swings. Emerging markets, on the other hand, include smaller, more growth-oriented economies such as Brazil, India, and China. These are more akin to small-cap U.S. companies — higher risk, but with more room for growth and the potential for greater returns over time.
Just as we recommend a meaningful allocation to large, stable U.S. companies paired with a smaller allocation to growth-oriented small companies, we apply the same logic internationally. The established international piece makes up the larger portion of the international allocation, while emerging markets serve as an important engine for long-term growth.
The Power of Risk-Adjusted Returns
If you ask which market performs better — the U.S. or international — my answer is always: tell me the timeframe, and I will tell you which one won.
Over the last 50 years, U.S. stocks have outperformed roughly 60 percent of the time. But when you look at very long-term return expectations over the life of the market, the expected outcomes for both U.S. and international stocks are actually quite similar — in the 9 to 10 percent range annually.
The real advantage comes from pairing them together. When the U.S. market is struggling, international markets are often there to help lift the total return of the portfolio. Over time, you can work toward your long-term growth goals without experiencing the full downside of either individual market.
The data makes this case clear. Over the past 50 years, when U.S. returns were less than 4%, the international stock market outperformed 100% of the time. When U.S. returns were less than 6%, international stocks outperformed 94% of the time.
By maintaining an appropriate mix — such as a 65/35 split between U.S. and international stocks — history shows you can actually lower your overall risk while still pursuing the positive returns you are working toward.
Remembering the Ebb and Flow
It can be easy to get caught up in a "what have you done for me lately" mindset. Because the U.S. market has been so dominant recently, international investing can feel counterintuitive.
But we have to look back at history and remember the natural ebb and flow of returns. In the investment world, a 10- or 12-year timeframe is not incredibly long when you are planning for retirement and the full duration of your financial life. If we look back to the early 2000s, there was an almost ten-year stretch of international stock dominance, largely led by emerging markets. During that period, international stocks were winning by a significant margin — and investors who were diversified benefited meaningfully.
The best time to ensure you are diversified into international stocks is often after a long run of U.S. outperformance. Right now, U.S. stocks look relatively expensive compared to their international counterparts. Spreading risk across dozens of countries rather than concentrating it in one is, over the long term, to the investor’s advantage.
How We Approach It
At Foster & Motley, we use carefully vetted mutual funds and ETFs
to provide cost-effective, broad diversification across global markets. Selecting individual stocks across dozens of international geographies would be impractical, so we do extensive due diligence on international funds — evaluating track records, cost structures, and risk profiles — to ensure we are putting forward the best tools available for our clients' portfolios.
Currency risk is another important piece of this puzzle. A strengthening or weakening U.S. dollar can impact returns on international investments, and we factor that into how we build and monitor allocations over time.
Ultimately, the goal is a portfolio built to foster life's wealth with greater consistency and less volatility — one that does not rely on any single market to carry all the weight.
If you would like to discuss how international diversification fits into your personal financial plan, schedule a discovery call with our team today.