When it comes to investing, we’re all prone to home bias, the habit of preferring U.S. stocks over international stocks. It’s an easy habit to pick up — and justify — given that the combined value of U.S. firms dominates the global marketplace. According to the World Bank, the value of publicly traded U.S. stocks at the end of 2018 was around $30 trillion, which was slightly more than the combined market value of the next 10 countries.
Your recency bias is likely at play, too. That’s the tendency to make investment decisions based on what we’ve most recently experienced. And U.S. stocks have been much better performers recently. Much, much better. Since the start of the current U.S. bull market in March 2009, an index of U.S. stocks has gained an annualized 16.8%, compared to 9.7% for an index of non-U.S. stocks.
But that large outperformance is one of the big reasons you might want to consider giving over more of your portfolio to international stocks for the years ahead. Right now, U.S. stocks are not “cheap,” which reduces the likelihood they will be able to repeat their strong returns for the decade ahead.
Each year, the Vanguard Investment Strategy Group, the wonky side of the Vanguard fund group, publishes an outlook that includes forecasts of returns for different types of investments over the next 10 years. In its 2020 outlook, Vanguard expects U.S. stocks will likely produce an annualized return for the decade ahead that ranges between 3.5% and 5.5%. Its forecast for international stocks is a range between 6.5% and 8.5%.
Research Affiliates, a firm that specializes in developing asset allocation strategies for institutional clients, publishes a monthly update of the returns it expects dozens of different types of investments to produce over the next 10 years. The median nominal annualized return for all global stocks is expected to be 4.9%. Breaking that down, U.S. large cap stocks — think: S&P 500 — have an expected return of 2.5%, U.S. small caps are projected to produce a 3.9% annualized return. An index of stocks from developed international economies has an expected return of 7.1%, and faster-growing emerging-market stocks are expected to return — with a lot higher volatility — a 9.2% annualized return.
All of that suggests now might be a smart time to revisit how much of your portfolio is invested in stocks from companies based outside the U.S. If you’ve been on autopilot during this bull market, chances are international stocks have become an even smaller part of your portfolio. For instance, if back in 2009 you had 75% of your stock portfolio riding on U.S. stocks and the other 25% on international stocks, that mix would now be around 85% U.S. and 15% international. Time for some rebalancing perhaps?
Or if you have yet to dip your toe into international markets, two low-cost index options that earn a gold rating from research firm Morningstar are Vanguard Total International Stock Index fund and iShares Core MSCI Total International Stock ETF (meaning, exchange-traded fund). Both portfolios own stocks in developing and emerging international economies. If you’d prefer to stick with developed-country stocks, a low-cost index option that also gets a top Morningstar rating is the SPDR Portfolio Developed World ex-US ETF.