International developed market stocks have underperformed the S and P 500 by roughly seven percentage points per year on average since 2010. That kind of long stretch eats away at conviction in a way that almost no other investing pattern does. Most of the American investors I talk to in 2026 hold either zero international or a token five percent allocation that does not move the needle. The argument they give is that US tech dominates global markets, that the S and P is global by revenue anyway, and that international has been broken for so long it might be permanently broken. I hold thirty percent of my equity portfolio in international stocks. Here is why.
The dollar is the most important variable that nobody talks about when they talk about US versus international returns. From 2011 through 2024, the US dollar strengthened against a basket of major currencies by roughly thirty percent. That dollar strength translated into a headwind for international returns when you measure them in dollars and a tailwind for US returns when you measure them in everything else. A dollar that strengthens forever is a US bull market. A dollar that weakens reverses both effects at once. The dollar in 2026 has been weakening for the last four quarters, which is the start of a regime that has not existed since the 2002 to 2008 stretch when international beat US by a wide margin.
Valuation is the second variable. The MSCI EAFE index, which covers developed markets outside North America, traded at roughly thirteen times forward earnings as of late April 2026. The S and P 500 traded at twenty-two times. That ten point spread is one of the widest gaps in the last fifty years and almost twice the long-term average. Valuation does not predict next quarter. It does predict the next ten years. Every academic study of long-term returns finds the same thing. Starting valuation is the single best predictor of ten-year forward returns. International is starting from a much better place than the US is starting from. That math will eventually show up in returns even if the timing is unknown.
Concentration risk in the US market is a third reason to diversify internationally. The top ten stocks in the S and P 500 represent roughly thirty-six percent of the index in 2026, the highest concentration since the late 1960s. Seven of those top ten are US technology companies whose business models share substantial overlap. If a single regulatory event, a single antitrust decision, or a single shift in AI capability hits that group, the concentration that produced the outperformance also produces the drawdown. International developed markets are far more diversified across financials, industrials, consumer staples, and energy. The diversification is not free. It costs you upside in a year like 2024. It pays you back in years that look like 2000 to 2002 or 2008.
Emerging markets are a separate category and I treat them separately. EM has been even more painful than developed international over the last fifteen years. Currency volatility, governance issues, and a brutal China decade have weighed on the asset class. I hold five to seven percent of equities in EM through a fund like Vanguard FTSE Emerging Markets at five basis points or iShares Core MSCI Emerging Markets at nine basis points. The case for EM is the same as the case for international developed but with more volatility on both sides. If you cannot stomach a thirty percent drawdown in a single year, EM is not for you. If you can, the long-term math is hard to argue with.
The implementation is straightforward. Vanguard FTSE Developed Markets at four basis points, Vanguard Total International at six basis points, iShares Core MSCI EAFE at three basis points. Any of these is fine. The expense ratios are low enough that the choice between them is mostly about which fund family you already use. I avoid the actively managed international funds because the data is clear that paying ninety basis points for an active manager in international stocks does not pay off any better than it does in US stocks. Index everything in this asset class.
A note on the home country bias. American investors hold an average of seventy-five to ninety percent of their equity portfolio in US stocks. The US represents roughly sixty percent of global market capitalization. The home country tilt is large by any measure. It is not irrational, because most of the spending you will ever do is in dollars and there is some natural matching of liabilities to assets, but it is heavier than the math justifies. Trimming the US allocation from ninety percent to seventy or sixty-five percent does not require a heroic prediction about international beating the US. It just requires the recognition that the next decade is unlikely to look like the last decade, and the portfolio that was built to win the last decade is not always the portfolio that wins the next one.
