Question: International investments haven’t seemed worth it in the past. However, recent swings in the market have given me reason to reconsider. Is it wise to include foreign investments in my retirement portfolio, especially since they’ve historically underperformed compared to U.S. stocks?
Answer: For years, financial advisors have urged retirement savers to include international stocks in their allocations.
The idea is to help smooth returns in retirement. When U.S. equities are in a slump, stocks of companies headquartered outside the U.S. will pick up the slack, or so the theory goes.
That theory hasn’t always worked out so well, at least until the past couple of months. For example, let’s consider the performance of two iShares exchange-traded funds.
The iShares Core S&P 500 ETF (ticker: IVV) tracks the S&P 500, while the iShares MSCI EAFE ETF (EFA) measures the performance of an index of large- and mid-cap stocks outside the U.S. and Canada.
| ETF | Returns over the past 15 years | Year-to-date returns |
| iShares Core S&P 500 ETF (IVV) | 13.23% | -3.45% |
| iShares MSCI EAFE ETF (EFA) | 5.88% | 10.65% |
So far in 2025, non-U.S. stocks are having their best year in over two decades. Tariffs and trade wars are having an impact as Trump administration policies are spurring pro-growth actions in Asia and Europe.
“Given today’s rich U.S. equity valuations, non-U.S. stocks may offer an attractive way to hedge your portfolio against a potential U.S. market pullback,” said Lisa Shalett, chief investment officer for wealth management at Morgan Stanley, in a February blog post. “Such a downturn is possible as U.S. policymakers weigh an end to their extraordinary support of the economy amid stabilizing growth, inflation and employment trends.”
Shalett cited valuations as another reason international stocks are currently attractive.
According to Yardeni Research, the forward price-to-earnings ratio of the MSCI all-country world index ex-U.S. is 13.9, versus 20.2 for the S&P 500.
Shalett also pointed to dividend yield as a factor driving international returns. On average, stocks in the non-U.S. index offer a 3% dividend yield, more than double that of the U.S. index’s stocks.
Here’s what some country and regional indexes have returned so far this year:
— Germany’s DAX: 15.5%
— STOXX Europe 600 index: 8.9%
— MSCI China index: 23.9%
— London’s FTSE 100 index: 6.5%
— MSCI Brazil index: 18.8%
Italy, Spain and Poland are outperforming U.S. stocks, as are Mexico and Canada, markets most affected by the current administration’s tariffs.
Implications for Retirement Savers
The current outperformance of international markets brings us back to the importance of diversification. Many retirement savers today have no memory of U.S. stocks lagging their international peers.
In theory, international diversification should balance returns throughout different economic cycles, valuation environments and growth opportunities.
While some of those factors are in play now, the main driver is trade wars. That’s not something most professional investors and analysts included in their forecast algorithms a year ago.
However, Vanguard analysts forecast in 2023 that U.S. retirement investors would be rewarded for holding international stocks in the coming decade.
[Read: Ask a Financial Pro: What Is the Best Time of Year to Retire for Tax Purposes?]
U.S. Stocks Overvalued
In a report on asset classes, Vanguard investment strategy analyst Ian Kresnak wrote that geographic diversification may help mitigate portfolio volatility.
“But in the current environment, we also view it as a good opportunity for U.S. investors to achieve higher relative returns, as the drivers of U.S. stock outperformance over the last decade have likely sown the seeds for their underperformance over the coming one,” he added.
In other words, those lofty price-to-earnings ratios of U.S. stocks could result in further price declines as these stocks are overvalued and vulnerable to rising interest rates. Not long ago, forecasters anticipated lower interest rates this year, but that may not happen as quickly as some had expected.
Home Country Bias
In most developed markets, including the U.S., retirement investors exhibit home bias, a tendency to over-allocate to domestic markets.
That makes sense in the U.S., which has an incredibly varied economy and range of industries. Investing in the S&P 500 gives you a variety of 11 different sectors, each with individual characteristics that can either help or hurt you in various economic cycles.
But don’t limit your retirement investments to the S&P 500.
Investing in U.S. multinational companies alone will not provide true international diversification, according to a 2024 report from Dimensional Fund Advisors. Dimensional’s data shows that between 1979 and 2022, in the months when the S&P 500 was in negative territory, the MSCI all-country index ex-U.S. index traded higher.
[Read: Ask a Financial Pro: How Much of My Retirement Should Be In Bonds?]
Top Performing Developed Markets
If that’s not enough incentive to include non-U.S. stocks in your retirement portfolio, I’ll leave you with one final piece of data from Dimensional.
Guess how many years U.S. stocks outperformed other developed markets between 2005 and 2024?
The answer is just one, in 2014. Countries that have taken the top spot include Canada, Spain, Finland, Japan, Norway, Sweden, Ireland, Belgium, Denmark, Austria, New Zealand, Portugal, Italy and, most recently, Singapore.
A savvy retirement investor wouldn’t overlook those potential gains by allocating only to U.S. stocks.
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Ask a Financial Pro: Should I Add Foreign Investments to My Retirement Portfolio? originally appeared on usnews.com
