With the U.S. stock market[1] dramatically outperforming the rest of the world over the past 16 years, it would be understandable to question whether one should invest internationally at all, let alone allocate a significant portion of their portfolio to international stocks.

First, the data on that (rather dramatic) outperformance[2]:

July 2008 – October 2024

But if we instead looked at the seven-year period immediately prior you’d see a similar outperformance in the other direction:

July 2001 – June 2008

During the latter years of that period of international stock outperformance, many investors decided to dramatically overweight international stocks in their portfolios (or not own any U.S. stocks at all), a decision that cost them dearly in the period that followed.  Similarly, many investors today have abandoned international stocks.  Human nature suggests this pattern will continue indefinitely.

To some, it might feel likely that the recent U.S. outperformance will continue, but evidence suggests that nobody has the ability to reliably make that prediction.[3]  Absent the ability to know which region will outperform going forward, it becomes imperative to diversify between the two.

When deciding how much to allocate to each, our target for global diversification has always been to “own the globe,” meaning to allocate to each country based on its relative proportion of the global stock market (as defined by market capitalization, or the total market value of its public companies).  Those market capitalizations are efficiently determined by millions of market participants attempting to determine the “right” price for every public company in every country on every day, and evidence suggests that trying to out-guess that collective wisdom would be unwise.

Thus, because the U.S. stock market currently represents approximately 60% of the global stock market[4], it currently represents 60% of our clients’ stock portfolios.[5]  Anything meaningfully above or below that allocation would be a bet for or against the U.S., and we don’t like to make bets.

As is the case with all asset classes, we invest our clients’ international stock allocation in low-cost, diversified, tax-efficient ETFs and index funds (primarily those managed by Dimensional Fund Advisors and Vanguard).  When possible, we hold them in taxable brokerage accounts to optimize for tax-efficient fund location (or more specifically, so the client does not forfeit the foreign tax credit for owning international stocks).

While it’s tempting to allow recent market returns or predictions to inform one’s regional investment allocations, it’s prudent to maintain a consistent, evidence-based approach to global diversification.

[1] While global diversification is also an important consideration for an investor’s bond portfolio, that topic is outside the scope of this post.

[2] US stock performance data comes from the CRSP Deciles 1-10 Index; International data from the MSCI All Country World ex-USA Index.  Source: Dimensional Fund Advisors.  Performance data shown represents past performance.  Past performance is no guarantee of future results.

[3] If it helps to prove the point, Vanguard and Schwab both predict that International stocks will outperform going forward.  That said, we do not rely on near-term market predictions in either direction for our construction of our client portfolios.

[4] Data as of 12/31/23.  Source: Morningstar.com (using four global stock market funds as a proxy for world market).

[5] We recalculate this split annually.