On December 29, 1989, Japan’s Nikkei 225 index closed at 38,915.87. It did not close above that level again until February 22, 2024, according to the Associated Press. That is 34 years without a new high for the stock market of what was, in 1989, one of the strongest economies in the world and home to many of its largest companies.
Nobody in Tokyo at the end of the 1980s thought of a Japan-only portfolio as risky. It looked like the obvious bet. That story is the best short argument for owning stocks outside your home country, and it applies to American investors more than many of them would like to admit.
What matters most
- Home markets can stall for decades. Spreading money across countries reduces the odds that one economy’s bad stretch defines your retirement.
- A low-cost total international index fund does most of the work. You do not need to pick countries.
- The exact percentage matters less than sticking with it. Pick a share you will not abandon after three bad years, then rebalance.
Why US investors lean so heavily on US stocks
Economists call it home bias: people overweight the market they know. For Americans the habit feels especially reasonable because the US market has been so strong for so long, and because large US companies already sell products all over the world. If Apple, Microsoft and Coca-Cola earn money abroad, why bother with foreign shares at all?
There are a few reasons. Revenue earned abroad is not the same as owning foreign businesses. A US multinational still trades on US valuations, reacts to US interest rates and moves largely with the US market. Meanwhile, entire industries are led by companies headquartered elsewhere: European drugmakers and luxury brands, Asian semiconductor manufacturers, Japanese automakers and industrial firms. An S&P 500 fund owns none of them.
Valuation also matters. Markets take turns. There have been long periods when US stocks beat the rest of the world and long periods when they lagged, and the leadership tends to change without warning. A portfolio that owns both does not need you to forecast which phase comes next.
The real risks of investing abroad
Going global is not free of downsides, and you should know what you are signing up for.
Currency swings
When you own a European stock through a US fund, your return depends on the stock and on the euro-dollar exchange rate. As the SEC’s investor guide to international investing explains, a foreign investment can rise in its home market and still lose value in dollars if that currency weakens. The reverse also happens: a falling dollar gives foreign holdings a tailwind. Over long periods currency effects tend to wash out somewhat, but in any given year they can add or subtract several percentage points.
Political and market structure risk
Some countries have weaker investor protections, less transparent accounting or governments willing to restrict capital flows. Emerging markets in particular can drop sharply and quickly. This is the main reason most investors hold emerging markets as a minority slice of their international allocation rather than the core.
Slightly higher costs
International index funds usually charge a bit more than broad US index funds, and foreign governments often withhold tax on dividends. In a taxable brokerage account you may be able to claim the foreign tax credit for that withholding. Inside an IRA or 401(k), you generally cannot, which is one reason some investors prefer to hold international funds in taxable accounts when they have the choice.
How to actually buy international exposure
You have three practical routes, from simplest to most hands-on.
- Total world fund. A single fund that tracks a global index holds US and foreign stocks in proportion to their market value. You get automatic diversification and never have to set an international percentage yourself.
- US fund plus a total international fund. This two-fund approach lets you choose your own split. A “total international” or “ex-US” index fund typically covers developed markets (Europe, Japan, Canada, Australia) and emerging markets (China, India, Taiwan, Brazil and others) in one product.
- Separate developed and emerging market funds. More control, more decisions. This only makes sense if you have a clear reason to tilt toward or away from emerging markets.
Target-date funds already include international stocks, usually somewhere in the range of a third or more of their stock holdings, so check before you add a separate fund on top. Before buying anything, read the fund’s fact sheet for the expense ratio, number of holdings and country breakdown. Our guide on how to read a fund fact sheet walks through each line.
What to check in an international fund
| Item | What to look for | Why it matters |
|---|---|---|
| Expense ratio | Lower is better; broad index funds are usually cheapest | Fees come out every year, regardless of returns |
| Emerging market share | Whether EM is included and roughly how much | Determines volatility and political risk |
| Small-cap coverage | “All-cap” vs. large and mid only | Affects how complete your exposure is |
| Top country weights | No single country dominating | Avoids recreating home bias somewhere else |
| Currency hedging | Hedged or unhedged | Hedged funds reduce currency swings but often cost more |
Most long-term investors use unhedged funds. Currency exposure is part of the diversification you are paying for, and hedging adds cost and complexity.
Common mistakes with foreign stocks
Chasing last decade’s winner. Investors tend to add international stocks after they have outperformed and drop them after a long slump. That is backwards. The case for diversification is strongest exactly when it feels least necessary.
Doubling up without realizing it. If your 401(k) target-date fund holds international stocks and you also buy a separate international fund in an IRA, add the two together before deciding you need more.
Buying single-country funds as a “diversifier.” A fund that holds only one foreign country is a concentrated bet, not diversification.
Ignoring company size. International funds that only hold large companies leave out a chunk of the market. The same tradeoffs apply abroad as at home; see small-cap vs. large-cap stocks for how size affects risk.
Setting your mix
There is no single correct international percentage. Global market-cap weighting puts the majority of the world’s stock market value in the US, with the remainder abroad, and a total world fund simply follows that. Many investors choose something between that market weight and a smaller tilt toward home, often landing in the range of 20% to 40% of their stock allocation in international funds.
Here is a simple way to decide:
- Start with your total stock allocation. Decide how much of your portfolio belongs in stocks at all, based on your timeline and tolerance for losses.
- Pick an international share you can defend in a bad year. If you choose 40% and international stocks lag for five years, will you hold? If not, choose 20% or 25% and mean it.
- Use one broad fund for the international slice. A total international index fund keeps it simple.
- Rebalance on a schedule. Once a year, or when your mix drifts more than about five percentage points, move money back to your targets. New contributions are the easiest way to do this without selling.
A hypothetical example: an investor with $100,000 who wants 80% in stocks and 30% of that in international stocks would hold about $56,000 in a US fund, $24,000 in an international fund and $20,000 in bonds. If a year later US stocks have surged, the next few months of contributions go to the international and bond funds until the mix is back on target.
The Nikkei example is extreme, and nobody can say whether the US will ever see anything like it. That is the point. Owning the world means you do not have to know.
