I am going to make the argument that if you live in the US, and are investing 100% in US stocks, that you are taking a big risk that is completely unnecessary. A risk that is easily diversified away by investing in cheap index funds. And even if you believe that the US will perpetually see superior returns over the coming decades, a 20% allocation will likely be a good starting point to mitigate significant risk that you are wrong.
But this thread isn't about those that just want to wet their toes into international investing. It's for those that are truly "owning the haystack" at near market weights! 40-60% Depending on where you think the appropriate global cap of exUS should be. For those even more daring, we invest even more than 60% in international.
I would argue that it would be a better decision to be 100% exUS than 100% US on the basis of currency diversification, sector diversification, political/country diversification, and demographic diversification. Yet, the former strategy is absolutely unheard of yet the latter is pretty common.
Things to like about International Equities:
- Valuations are close to half that of the US
- ExUS as a percentage of total market cap is at a historical low
- The majority of the US outperformance over the past 30 years has been due to changes in valuation rather than fundamentals
- Emerging Markets have superior demographics and some growth aspects of their stocks for cheaper valuations
- Despite a very poor decade coming out of the GFC, the Eurozone's debt situation slowly improves
- US has gone from 1/3 of market cap to nearly 2/3 in three decades. Either US goes even higher from these all time highs, it mean reverts, or it stays flat...take your pick on which one you think is most likely to occur. In two of the scenarios, international does just fine.
- A period of high US inflation, dollar debasement, and a transition away from the reserve currency status will be a tailwind for international stocks to go higher for multiple reasons; commodities, tangible products and services, and more "value" oriented companies that don't have astronomical expectations of future cashflows
I personally have a slight tilt (60%) towards international/emerging markets, with 40% in the US. I may even consider going as high as 2/3s to 3/4s, or it will naturally rise to these levels if we see strong exUS outperformance in the future. Despite the relatively lesser returns over the past decade, this has proven to provide a roughly 10% annualized return and I have been able to stay the course just fine. And even of my US equities, I'm invested in roughly half of those towards Small Cap Value. The equity valuations of US TSM are somewhat alarming to me and I'd personally rather not be so highly exposed when I see better values elsewhere. I liked US equities a decade ago, but I'm not so enthusiastic about starting valuations from where we are at today.
Of course, I could be wrong. US stocks could mimic Japan in the 80s and continue to rapidly increase to obscene levels of global market caps on the backs of speculative megacorp tech stocks that will have no global competition and end up ruling over everyone else with their superior platforms. I find this argument to be highly unlikely if history is our guide, but even so - I will benefit from the amount I have allocated to US TSM.
Nobody knows nothing, but I do know that history tends to rhyme.