MW Why it's smart for Americans to have international stocks in their portfolios - no matter what the market's doing

By Brett Arends

Fidelity Investments says the average 401(k) plan holds 38% of its assets in U.S. stocks and just 5% in international stocks. This is insane.

Chances are, you don't have enough of your portfolio in international stocks or international stock funds. Hardly anyone does. As a result, you're taking on more risk than you need to, and probably sacrificing returns as well.

This was true even before this year, and since January international stocks have outperformed U.S. stocks by a staggering 15 percentage points.

Contrary to what the average U.S. investment adviser or guru may tell you, international stocks are neither exotic, nor risky, nor a permanent source of low returns. None of those things are remotely true. The modern American drives their Toyota $(TM)$ RAV4 (Japan) to the supermarket to pick up DiGiorno pizza (NSRGY) (Switzerland) and Ben & Jerry's Ice cream $(UL)$ (the U.K. and the Netherlands), swings by Sephora $(LVMUY)$ (France), before stopping at the pharmacy to collect their latest prescription of Ozempic $(NVO)$ (Denmark).

Then they go to their broker, who tells them to keep their money in U.S. stocks and steer clear of those dubious weirdos overseas.

Fidelity Investments tells me the average 401(k) plan holds 38% of its assets in U.S. stocks and just 5% in international stocks. This is insane. The rest of the world accounts for about 80% of the global economy. They account for about 60% of the world's publicly traded stocks. Markets such as London and Amsterdam have been trading stocks since before America even existed. Many international markets, such as Japan, Australia and the leading bourses of Europe, have comparable levels of depth, trading volumes and corporate governance to the ones at home.

Oftentimes they are better. Enron, WorldCom, Lehman Brothers - what makes us think U.S. corporate governance is so terrific again?

Which markets produce higher returns, the U.S. or international? The honest answer is: Neither, or both, depending on when you buy and sell. Yes, since 1970 the U.S. has produced higher overall returns than the EAFE international index, according to MSCI. Including reinvested dividends, and measured in U.S. dollars, the MSCI U.S. has beaten MSCI EAFE by an average of about 1.3 percentage points a year-a huge difference in investment terms and the source of major gains over the long term. But the numbers obscure as much as they reveal. All of that U.S. outperformance has been since 2010. All of it. From 1970 (when the data starts) through 2009 international stocks beat U.S. stocks.

International investing drastically lowered your risks during all that time. Since 1970, the EAFE index has beaten the U.S. in 40% of all rolling three year periods, 45% of all five year periods and 50% of all 10 year periods. (I'm just using calendar years here.)

Yep: Over any given 10-year period of the past 54 years, international stocks "won" half the time.

And these things typically go in cycles - meaning that periods when one side has done better are usually followed by a period where the other side does. After long spells of U.S. outperformance - such as in 1999-2000, and recently - you can hear people insist that you don't need international stocks at all. It is bad advice generally and usually comes at the worst time.

There may be multiple reasons why these cycles happen. The most obvious ones are simply investment fashions. During the 1980s, Japanese stocks achieved cult status among investors, including professionals. In the late 1990s, big U.S. stocks did the same. European stocks were the subject of a fad in the mid-2000s (along with emerging markets).

The same thing has happened recently. From around 2015, U.S. stock prices began to soar far ahead of international peers. They became far more expensive. By the end of last year, when talk of "U.S. exceptionalism" was widespread, U.S. stocks accounted for an absurd 70% or more of the global stock market by value.

What should it be? MSCI tracks a theoretical "equal weight" global index, which simply counts all the midsize and big companies in 23 developed countries around the world. As the name suggests, the index monitors what would happen if you placed an equal amount in each stock. You can see the data here and it's useful for one thing in particular. It tells us that U.S. companies account for just over 40% of the companies. Would it be crazy to have 40% of your stock allocation in the U.S. and 60% in developed international markets? No, it would be logical.

-Brett Arends

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April 09, 2025 09:51 ET (13:51 GMT)

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