The most common reader question about my personal portfolio is definitely the fact that the allocation to international stocks has been a drag on performance relative to owning 100% US stocks. This is kind of a repeat topic, so I won’t dive into the full debate again, but wanted to offer some expanded and updated thoughts to my response to a comment from reader John. All numbers below are taken as of January 2025.
The divergence between the performance of US stocks and the rest of the world started around 2009, which of course coincided with most of my investing lifetime so far. 😒 Here’s a chart from the Bloomberg article Global Diversification Has Disappointed. Don’t Give Up on It (gift article for next 7 days). Worth a read.
As noted in my portfolio updates, my asset allocation floats along with total world market cap breakdown, as tracked according to the Vanguard Total World Stock ETF (VT). I remember a time when it was only 45% US and 55% Rest of the World (World ex-US). As of the end of 2024, it is now at 65% US and 35% World ex-US.
In practical terms, this means that I used to own about the same amount of Vanguard Total US Stock Market ETF (VTI) and Vanguard Total International Stock ETF (VXUS), a 1:1 ratio. But as of the end of 2024, I now own about double the amount of VTI relative to VXUS, a 2:1 ratio. So my performance isn’t exactly that of the chart above due to ongoing investments over time, but it’s still been much lower than if I used owned 100% US stocks.
I can’t change the past. The question is: Should I change my asset allocation now?
Let’s look closer. A significant chunk (not all) of the outperformance has been due to a higher P/E ratio. Below is a Yardeni chart of the P/E ratio of US stocks vs. International stocks. The gap looks like the greatest in 25 years. Can this trend continue? I don’t know, and I don’t think anyone really knows.
Are US stocks simply a better investment, forever? They might be. The US definitely offers a very business-friendly environment overall. That’s why I just let it float. If the US manages to continue this outperformance in the future, then one day my allocation might grow to 75%/25% (3:1 ratio) or even 80%/20% (4:1 ratio). My portfolio adjusts.
This is the same theory as owning all of the companies in a market-weighted S&P 500 index fund: you own all the winners, and you also own the losers, but owning the winners is good enough to pull everything up overall. If the US keeps being a huge winner, I’ll own a lot of the US. If not, I still own the entire haystack. Therefore, I plan to continue holding a chunk of international stocks according to the investable market-cap float with maybe a slight home bias.
I could sit here and lament how big my portfolio would have been if I had bet on 100% US for the last 15 years, but honestly the stock markets have been kind to me as a business owner (although I’d say at the expense of the average worker bee) even with my international stocks and bond holdings. The 10-year trailing average annualized return has been 9.33% for VT vs. 12.50% for VTI. Owning a mix of winners and losers has still worked out just fine, and I was covered in case history turned out differently. I have no complaints.
Photo by Andrew Neel on Unsplash
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US outperformance has been concentrated in the “Magnificent Seven” — so a US total market bet has actually been a bet on a handful of technology monopolies. Their performance is “expected” to fade in the fashion of one-time giants such as JP Morgan, US Steel, the railroad firms, GM, GE, IBM, Dow, etc. Key factors include whether the government goes after them using anti-trust laws, whether they stumble or if other competitors emerge, and whether institutional investors move to another fad. IMO the pros thought the Seven were vastly overpriced some time ago, but it’s hard to get off the momentum bandwagon. Too much easy money, and investing bubbles are routine in human history.
Per my reading and experience, similar investing fads cycle and reappear every 20-30 years. These include tech, large cap, small cap, “value”, international, emerging markets, gold/Bitcoin, etc. The US tech mega stocks are poised for correction or stagnation, but it’s anyone’s guess whether a serious correction will happen in our lifetimes. Given the huge, huge, huge amount of money currently in the Mag Seven, a tiny asset reallocation by the big players would send other sectors through the roof and shift the momentum investors there.
https://www.fool.com/investing/2024/03/29/magnificent-seven-ranked-by-performance/
https://finance.yahoo.com/news/one-chart-shows-how-the-magnificent-7-have-dominated-the-stock-market-in-2023-203250125.html
I finally eliminated my international exposure. The main problem is that Int’l correlates with the US S&P.
Jonathan,
VT has a beta of 1.01 while VOO is 1.00.
So one is getting less gain for the same volatility. What is the pro here?
I’m not trying to convince anyone else to own the same things that I own, but I do want to point out that if your argument is based on the last 25 years of past performance (returns, correlations, volatility, sharpe ratio, beta, etc) then you would have been convinced to hold international stocks in 2009. All that stuff can change over the next 25 years, and it did.
Hindsight is 20/20.
Following recommendations I read from a Warren Buffet interview years and years ago, I dropped all my international allocation 15+ years back now (it was 25% of my portfolio at the tame) and haven’t regretted it one day. Have been running a 70% US Total Market and 30% Bond allocation since and have no plans to change it.
Same here, dropped internation maybe 15 years ago. This is the ONE actual thing I truly benefitted from listening to the old man Buffett!
And yes hindsight is 20/20. But the last 15 years of outperformance of the US vs. International have secured a lot of underperformance in the future.
LIkewise, Buffet was the reason for not being heavy with international. Also, you do technically get international exposure to US stocks becasue most of the big companies have operations in international markets, as well.