Ignoring International

Quick definition: Ignoring international stocks means holding an all-domestic portfolio (100% U.S. stocks for U.S. investors), eliminating geographic diversification and concentrating all market risk in one country.

Key Takeaways

• All-domestic portfolios offer zero geographic diversification and unnecessary concentration risk.
• International stocks have delivered 7–10% annual returns historically, comparable to U.S. returns, but with return patterns that differ from U.S. markets.
• Currency fluctuations can amplify or dampen international returns; long-term investors can hedge or accept currency risk depending on their situation.
• International exposure via multinational U.S. corporations is indirect and insufficient; direct ownership of international stocks provides cleaner diversification.
• Missing international exposure during outperformance periods (like 2000–2009 or 2021) can result in millions of dollars of lost wealth.

Why Some Investors Ignore International

The decision to completely ignore international stocks is rooted in several misconceptions. First, some investors believe that U.S. multinational corporations already give them international exposure, so owning direct international stocks is redundant. Second, some investors fear currency risk and prefer to keep money in dollars. Third, some believe that U.S. stocks are simply better investments than international stocks. Fourth, some investors default to simple U.S.-only portfolios out of convention or inertia.

Each of these reasons has some intuitive appeal but does not hold up to scrutiny. U.S. companies do have international exposure, but that exposure is filtered through a U.S. management lens and includes the profitability margins specific to U.S. operations. Owning Apple means owning a company that earns revenues globally, but you are not buying Apple from the perspective of a European investor or an Asian investor. You are buying Apple as a U.S. corporation, which then happens to operate internationally. The economic dynamics are different. Currency risk is real but manageable and not a reason to avoid the diversification benefit. U.S. stocks have not consistently outperformed international stocks over all periods. And defaulting to the simple choice is often a mistake in investing.

The Real Opportunity Cost of Ignoring International

The opportunity cost of ignoring international stocks is substantial. Consider a simple historical comparison: from 2000 to 2009, the S&P 500 returned roughly 0% (the dot-com bubble burst, the market recovered, then the 2008 crisis hit). Meanwhile, international stocks (including emerging markets) returned 7–10% annually during the same period. An investor who kept $500,000 in a U.S.-only portfolio would have had roughly $500,000 by 2009 (flat returns). An investor who split their portfolio between U.S. and international stocks (50/50) would have had roughly $750,000 by 2009. The opportunity cost: $250,000, or 50% of the original investment.

This is not a theoretical scenario. Millions of investors were in this exact situation in 2009. They had stayed the course with all-U.S. portfolios, telling themselves that U.S. stocks were the safest choice. They watched international stocks soar while their portfolios stagnated. Had they owned international exposure, they would have doubled their wealth during a period when they felt like they were standing still.

More recently, from 2020 to 2024, U.S. stocks (particularly large-cap tech) surged while international stocks lagged. An all-U.S. investor would have had tremendous returns. An all-international investor would have lagged badly. But did anyone know in 2020 that U.S. would dominate for four straight years? No. In 2020, many market commentators actually expected international stocks to finally catch up to U.S. stocks after a decade of underperformance. It did not happen, but no one knew that at the time.

The point is not that you should own international stocks because they will outperform in the future. You should own them because you cannot know which markets will outperform, and diversifying across all major markets removes your reliance on being correct about that forecast.

International Stock Returns and Volatility

Over the very long term (50+ years), U.S. stocks and international stocks have delivered comparable returns. U.S. stocks have returned roughly 10% annually (before inflation). International developed-market stocks (Europe, Japan, Australia) have returned roughly 9–10% annually. Emerging-market stocks have returned 10–12% annually (though with higher volatility). There is no compelling evidence that U.S. stocks are inherently superior long-term investments.

The volatility picture is more nuanced. U.S. stocks have moderate volatility. International developed stocks have comparable or slightly lower volatility. Emerging-market stocks have higher volatility. But all three have delivered positive long-term returns. The volatility differences mean that an all-U.S. portfolio and a diversified global portfolio have similar long-term risk profiles, but the global portfolio has better diversification.

The correlation between U.S. and international stock returns is imperfect, typically 0.70–0.85 (where 1.0 is perfect correlation and 0 is no correlation). This imperfect correlation is the entire point of diversification. When U.S. stocks stumble, international stocks often do better, and vice versa. An all-U.S. portfolio has a correlation with the U.S. economy of 1.0—perfectly exposed to U.S. economic outcomes. A diversified global portfolio has a correlation closer to 0.9, providing meaningful insulation against U.S.-specific downturns.

Currency Risk and Its Management

One of the primary objections to international stock ownership is currency risk. When you buy stocks denominated in foreign currencies (euros, yen, yuan), your returns depend not only on the stock price appreciation but also on currency movements. If you buy a Japanese stock that appreciates 10% in yen but the yen weakens 10% against the dollar, your dollar returns are 0%. Conversely, if the yen strengthens, your returns are amplified.

Currency risk is real, but it is not a reason to avoid international stocks. Here is why:

First, currency movements are roughly as likely to help as hurt over long periods. Over any given year, a currency might strengthen or weaken. Over decades, currency movements tend to mean-revert. A currency that is very strong one decade tends to weaken the next (because strong currencies make exports less competitive, which eventually weakens the currency). A currency that is very weak tends to strengthen. An investor with a multi-decade time horizon can largely ignore currency fluctuations.

Second, you can hedge currency risk if you want to (using currency-forward contracts), though this adds costs. Most passive investors simply accept currency risk as part of the investment.

Third, currency fluctuations have historically been a small component of total return variance. Stock price movements dominate currency movements. A stock that rises 15% in its home currency will have roughly 13–17% returns in your home currency, depending on currency movements. The stock movement is still the primary driver.

Fourth, currency diversification is itself a benefit. Just as owning stocks from many countries reduces your exposure to any single country's economy, owning multiple currencies reduces your exposure to a single currency's inflation or deflation. If the dollar weakens (as it has periodically), international stock returns are amplified. That amplification is precisely what you want in a downturn for your home currency.

Direct Ownership vs. Indirect Exposure

Some investors argue that they get sufficient international exposure through U.S. multinational corporations like Apple, Microsoft, Coca-Cola, and Chevron. These companies earn substantial revenues internationally. Should you not just own these U.S. companies and avoid international stocks?

The answer is no, and here is why. When you own Apple as a U.S. investor, you are buying Apple from the perspective of a U.S. shareholder. You are exposed to:

• Apple's global profitability (good)
• U.S. tax rates and regulations (which apply to Apple's consolidated income)
• The dollar's strength or weakness (which affects the competitiveness of Apple's products globally)
• U.S. investor sentiment about Apple
• Apple's management decisions, which may not be optimal from a global perspective

When you own a European computer company directly (say, Siemens or Infineon), you are exposed to:

• That company's profitability (which may serve different markets)
• European tax rates and regulations
• The euro's strength or weakness
• European investor sentiment
• That company's management, which may have different strategic priorities

The difference is meaningful. A truly global portfolio owns companies from many countries, which gives you exposure to the economic outcomes, tax environments, and investor sentiment of multiple countries. An all-U.S. portfolio, even if all the companies are multinational, filters everything through a U.S. lens.

Moreover, there are many excellent international companies that have no U.S. listing and no significant U.S. investor base. Asian technology companies, European industrial companies, and emerging-market leaders are underrepresented in the portfolios of U.S. investors who only buy U.S. stocks.

The Psychological Trap of Recency

The strongest psychological force keeping investors away from international stocks is recency bias. The U.S. stock market has significantly outperformed international stocks from 2010 onward (with the exception of 2021). U.S. investors see this performance advantage and conclude that U.S. stocks are better. But this is a classic recency bias trap. The U.S. led for 15 years (2010–2024), but before that, from 2000–2009, international stocks led. Before that, from 1990–2000, U.S. stocks led (driven by the tech bubble). The leadership rotates.

An investor who decided in 2009 (after a decade of U.S. underperformance) to abandon U.S. stocks and go all-international would have regretted that decision in 2010 as U.S. stocks surged. An investor who decided in 2000 (after a decade of U.S. outperformance) to abandon international stocks for all-U.S. would have regretted that in 2001–2009. The key lesson: do not make portfolio decisions based on the last decade of performance. Make decisions based on diversification principles.

Building a Complete International Allocation

A complete international allocation includes both developed markets and emerging markets. Developed international markets (Europe, Japan, Australia, Canada, New Zealand) represent roughly 20–25% of global market capitalization and offer stability and liquidity. Emerging markets (China, India, Brazil, Russia, etc.) represent roughly 12–15% of global market capitalization and offer growth potential but with higher volatility and currency fluctuations.

A typical allocation might be:

• 55–60% U.S. stocks
• 20–25% International developed stocks (via a single EAFE or similar index fund)
• 10–15% Emerging-market stocks (via a single emerging-markets index fund)
• 20% Bonds

This allocation is roughly proportional to global market capitalization. It provides genuine geographic diversification. It is simple to implement with just two international equity funds. And it ensures that you benefit from global growth, wherever it occurs, without having to forecast which markets will outperform.

How it flows

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The seventh mistake is developing a bond-allergy, where investors avoid bonds entirely in the belief that stocks always outperform, missing the diversification and stability that bonds provide.