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[Prefer to listen? You can find a podcast version of this article here: E267: Should You Invest in International Stocks?]

It’s easy to be attracted to U.S. stocks, especially after a long period of great performance. Over the past few years, the S&P 500 has posted strong returns, significantly outpacing historical averages. That kind of momentum leads many investors to ask, "Why should I invest outside the U.S.?"

Additionally, the S&P 500 is arguably the most well-known index in the world. It's the one we always hear about and is the benchmark that news outlets like to highlight and sensationalize in the financial media. 

However, when we step back and look at the bigger picture, the case for international diversification becomes clearer and more compelling.

Recency Bias and Market Momentum

As of late 2024, U.S. stocks have enjoyed a strong run. Over the past five years, the S&P 500 returned an average of 14.5% per year, which is well above its historical average of around 10%. Much of that performance has been driven by a small group of tech giants, often referred to as the “Magnificent Seven.”

While that performance has been exciting, it can skew perceptions. Strong U.S. market returns often trigger a common behavioral mistake: chasing recent performance and ignoring the long-term benefits of diversification.

The Case for Global Diversification

Markets move in cycles, and the U.S. is not immune to downturns. We’ve seen this before. From 2000 to 2009 (a period often referred to as the "Lost Decade"), the S&P 500 posted a negative return of approximately -0.9% annually. Go back even further to 1965–1981, and you’ll find a 17-year stretch where U.S. stocks underperformed even low-risk Treasury bills.

These long stretches of underperformance illustrate a fundamental truth about investing: past performance does not guarantee future results. Just because U.S. stocks have performed well recently doesn’t mean they will continue to do so indefinitely.

That’s where global diversification comes in.

Global Stocks Are More Than Just “Foreign”

It’s important to remember that when you invest internationally, you're not buying countries—you’re investing in companies.

Global diversification gives you access to thousands of companies all over the world, many of which are leaders in innovation, manufacturing, technology, and consumer goods. These businesses are run by smart, driven people with the same goals as their U.S. counterparts: to generate profits and create shareholder value.

Some of the most recognizable brands aren’t even U.S.-based. For example, Budweiser is owned by a Belgian company. Trader Joe’s is owned by a German company. As consumers, we already diversify internationally every day without thinking about it.

So why wouldn’t we apply that same logic to our investments?

What the Data Shows

In recent months, international stocks have actually outperformed U.S. equities. Non-U.S. developed markets have shown double-digit returns, and emerging markets have also posted solid gains.

This isn't an anomaly. Historically, most countries (U.S. included) have experienced multi-year periods of underperformance. In fact, when analyzing over 40 countries, all but seven have seen at least one 10-year period of negative returns in their equity markets.

Investing only in U.S. stocks is essentially making a bet that the future will continue to look like the recent past. And as we’ve seen time and again, that’s not a wise assumption.

What About U.S. Multinational Companies?

A common objection to global investing is: “Don’t large U.S. companies already generate revenue from all over the world?”

While it’s true that many S&P 500 companies earn significant revenue abroad, research shows that a company's stock price tends to move more in line with its home country market rather than where it earns its revenue. That means U.S.-based multinationals still behave more like U.S. stocks, not truly diversified global assets.

And just as the U.S. has global corporations, so does the rest of the world. Companies headquartered in Europe, Asia, and elsewhere are also generating revenue globally and driving innovation.

Learning from Japan’s Example

One of the most powerful examples of the danger of home-country bias is Japan.

In 1990, Japanese stocks represented over 40% of the global equity market. Investors were convinced Japan was the future. But over the next three decades, Japanese stocks were largely flat. Today, Japan makes up only about 5% of the global market.

Imagine being a Japanese investor in 1990 who ignored diversification because of recent strong performance. That’s the risk of relying too heavily on what’s working “right now.”

Small-Cap and Value Stocks Around the World

Another advantage of global investing is the ability to diversify not only by geography but also by market segment.

Small-cap and value stocks (often considered to have higher expected returns over time) don’t always move in sync across regions. For example, in years when U.S. small-cap value stocks underperform, international small-cap value stocks may outperform, helping to balance your portfolio and improve overall reliability of outcomes.

Over the past 20 years, size and value premiums have remained positive in non-U.S. developed and emerging markets, even when those factors have lagged in the U.S.

Stick to the Plan

At the heart of successful investing is a simple truth: the future is uncertain.

You can’t predict which country or market segment will lead over the next decade. But by owning a globally diversified portfolio, you give yourself the best chance to benefit from the growth of companies—wherever they are headquartered.

When U.S. markets soar, it’s tempting to double down. But history reminds us that strong periods are often followed by corrections or stretches of underperformance.

Staying diversified is not about abandoning U.S. stocks. It’s about building resilience into your portfolio. It’s about accepting that surprises (both good and bad) are part of investing. And it’s about positioning yourself to capture returns from wherever they happen to come.

Diversification is Key

Diversification works across sectors, asset classes, and borders.

Whether you're investing in a start-up in Silicon Valley, a luxury goods firm in France, or a technology manufacturer in South Korea, you’re participating in the global economy. Limiting your investments to a single country, no matter how successful, means ignoring a large portion of the world’s opportunities.

So the next time you hear a headline declaring there’s “no alternative to U.S. stocks,” remember: markets change, and so do leaders. A globally diversified portfolio is your best defense and your best opportunity for long-term success.