US, Global, & Ex-US Portfolios

Introduction

Harry Markowitz, the recipient of both the John von Neumann Theory Prize and the Nobel Memorial Prize in Economic Sciences, once said “diversification is the only free lunch” (Halliburton 2019). Conversely, Jack Bogel, the founder of Vanguard Group, famously believed international stocks did not merit inclusion in a US portfolio because US companies derive 40% of their revenue from international markets, thereby creating a form of de facto global diversification (Benz 2023). Unfortunately, an investor that only invests in US equities may be leaving money on the table. Today the European Union derives nearly 25% of its income from the US while Japan earns 16% of its revenue in US markets (Dziubinski and Lefkovitz 2023). If an investor accepts Mr. Bogel’s revenue-based argument, it means the investor would not be fully exposed to US earned income (Dziubinski and Lefkovitz 2023). 

US companies, particularly certain large caps, are innovative, profitable, and global. Yet, there are several foreign companies that are similarly strong, such as Nintendo, Sony, Siemens, TSMC, ASML, Novo Nordisk, and Hermès (Dziubinski and Lefkovitz 2023). Over the past several decades, correlation between US and international markets has increased, meaning the diversification benefit of being globally invested may have decreased. However, as rhetoric in today’s political environment becomes progressively more nationalistic and global trade barriers expand, correlations may weaken, and the benefit of global diversification should return.

Why Hold a US-Only Portfolio? 

The US is considered an excellent investment market because:

1. The capital markets are deep
2. The dollar is the world’s reserve currency
3. US markets are relatively transparent and well regulated
4. The political environment has traditionally been comparatively stable 
5. By market cap, the US represents over 60% of global equity markets
6. Depending on the interval measured, it has historically outperformed international markets in terms of absolute returns

The below three indexes will serve as performance proxies of US, ex-US, and a custom global equity portfolio: 

1. S&P 500 TR: 100% US Portfolio
2. the MSCI ACWI ex USA GR: 100% ex-US Portfolio
3. S&P 500 TR.MSCI ACWI ex USA GR: 60% US and 40% Global Portfolio 

In terms of absolute return, between 1 Jan 1996 to 6 Jan 2025, the 100% US portfolio outperformed both the ex-US and global portfolio by a wide margin. Relative to the ex-US portfolio, the US portfolio’s return was 4.14x higher, and against the global portfolio, the US portfolio was 1.66x better. 

From a risk perspective, the drawdown of the US portfolio has been roughly aligned with both the ex-US and global portfolios. 

Finally, over the span of 1996 to 2025, the US portfolio had nearly twice the annualized return with lower volatility than the ex-US portfolio. The global portfolio experienced the lowest total volatility while underperforming the US portfolio by 176 basis points per year. 

In summary, US portfolio returns have exceeded both a global portfolio and an ex-US international portfolio since 1996.

Why Hold a Global Portfolio (US & Foreign Equities)?

A global portfolio may be broadly considered a hedge against country specific risk. According to JP Morgan, since 1971, the US has experienced multiple cycles during which it underperformed international markets. Over a period of 5.6 years in the 1980s, the foreign markets outperformed the US by 299%. More recently, there is a 7.2-year period during the 2000s, a time flanked by the Dot Com Bubble and the Global Financial Crisis (GFC), that international markets outperformed the US by 65%. Each period of US underperformance has been countered with a period of US strength. Except for a brief 1.3 years, the past 16 years have seen the US regularly outpace international equity markets (Manley, n.d.).

The US’s post-GFC performance, combined with its valuation relative to international markets, has many analysts anticipating a market correction. Presently, US equity markets represent 60% of global market capital, but the US economy is only 25% of global activity. In 2008, the US represented 40% of the global equity markets while producing 23.05% of global GDP (YCharts, n.d.). Furthermore, the US dollar is strong, estimated at 12% over its historical value as calculated per fundamental currency drivers (Dziubinski and Lefkovitz 2023).

The US markets are also highly concentrated vs. historical levels, with the market cap of the top 10 companies in the S&P representing 32.5% of total value (Subramanian, n.d.). As a point of comparison, in 2008, the top 10 companies represented only 16% of the S&P’s total market cap. According to Morningstar, on June 9, 2023, the US Equity Market Index maintained a 60% premium, as measured by the market price-to-earnings (P/E) multiple, to international markets (Dziubinski and Lefkovitz 2023). In comparison, 15-years ago, the P/E premium between US and international was 15%. Morningstar also finds that the US is trading at a price-to-fair value basis of 1.04, implying a 4% premium on US equities as of January 15, 2024. Finally, dividends on international stocks are 2x the dividend rate of US stocks. 

Focusing on specific markets, discounted cash flow models produced by Morningstar reflect an expectation of double-digit returns on international stocks in 2025. Both EU and Asia are inexpensive, with EU equities trading at a 5% discount to intrinsic value, and small cap specific EU stocks at a 40% discount. In emerging markets (EMs), Morningstar is bullish on Latin America, following a 22% correction in 2024, a time during which EMs broadly were up 12% (Straehl and Field, Michael 2024). Assuming Morningstar is right in its international markets analysis, that does not mean that markets will correct, nor does it mean that a bull run in foreign equities necessitates a correction in the US. Price dislocations have been shown to materialize slowly, but correct quickly, making them statistically difficult to time. 

As of February 6, 2025, in USD terms, the German Dax has climbed 9.9%, France’s CAC 40 is up 8.77%, and the Stoxx Europe 600 has returned 7.57%, while the S&P 500 is up only 3.52%.

Some analysts consider Europe’s recent performance as a sign that it may finally have reached a bottom, citing lower relative interest rates, higher savings rates, and full employment in the labor market as catalysts for growth. On February 5, 2025, the EU Commission introduced the Competitive Compass, which is a new initiative designed to increase productivity through deregulation and improved energy policies (Nicastro, n.d.). However, the commission did neglect to provide details on how it will achieve its goals. 

The surge in European equities has coincided with the arrival of DeepSeek, a new political regime in the US, and tepid earnings from Alphabet and Microsoft. The EU is trading at 14 times earnings, and the UK is at 12 times, while the US is 22x (Dulaney 2025). Perhaps the year-to-date (YTD) performance of EU equities is a sign of a more lasting pivot, or it may prove to be short lived. Either way, diversification between both the US and EU is the best way to hedge against underperformance in a particular market. 

Behavioral Considerations

In the late 1990s, investors were strongly bullish on the US markets, valuations were high, with reputable pundits declaring the Dow would reach valuations ranging from 40,000 and 100,000, despite PE ratios of 50x. By the end of the Dot Com Bubble, the Dow closed at 7,286.27. 

Following years of “irrational exuberance,” a term coined by Allen Greenspan, investors had soured on US markets, and analysts pivoted to Brazil, Russia, India, China, and South Africa (BRICS) as the future. Foreign markets consistently outperformed the US throughout the aughts, until the GFC, after which investors again returned to the idea of American exceptionalism. Since 2008, except for a brief 1.3 years, the US markets have handily outperformed ex-US markets by a significant margin. Today analysts and investors are again questioning the utility of foreign market exposure. 

Revealed in this brief exposition is the cyclicality of markets and the notion that investor behavior is sometimes irrational. Cognitive biases may propel asset prices far beyond fundamentals, priming a market for correction. An example of such a bias is recency bias. A person subject to recency bias discounts historical events while prioritizing the importance of recent ones. This can be seen when an investor sells into a bear market and subsequently buys into a bull market. 

Recency bias, as it relates to US vs. global diversification, may result in an individual interpreting contemporaneous US market performance as a sign that global portfolios provide neither present nor future material benefit. Centering one’s conviction on the idea that a price will rise tomorrow because it rose today, or in the case of the US, the price will outperform relative to other economies because it has for the past 15 years, is not commonly considered an empirically robust justification for portfolio selection. 

Recency bias is but one of many cognitive biases that may result in investors making asset allocation decisions based on emotional rather than empirical processes. Other examples include anchoring, herding, and framing. Cognitive biases are unavoidable, oftentimes helpful, but can result in poor decisions. Investors should attempt to be mindful of innate biases and harness them to make decisions, but try to contextualize them with respect to fundamental factors driving markets. 

Conclusion

According to Fidelity, between 1950 and 2022, a globally balanced portfolio, meaning a portfolio comprised of 70% equities and 30% fixed income, would have returned an annualized 10.5%. A US-only stock portfolio, over the same period, would have produced an annual return of 10.9%. Based on absolute return alone, the US portfolio outperformed by 40 basis points; however, on a risk adjusted basis, the balanced global portfolio produced lower volatility, creating a superior risk adjusted rate of return (Fidelity Wealth Management 2024). 

Most investors do not have a 72-year investment horizon. Thus, the typical investor may not benefit from long-term mean reversal in performance and will be far more sensitive to the effect of market timing. The performance of US vs. ex-US markets is historically cyclical, and it seems reasonable to believe future markets will behave similarly. Currently, many analysts are expecting, based largely on valuations, that the US market may be expensive relative to international markets. Yet, from a productivity perspective, the US continues to excel, which may provide fundamental justification for a US market premium, or, conversely, it may also indicate the US market is overheating. 

For long-term investors seeking to hedge their portfolios from the idiosyncratic effect of country risk and cognitive biases, a globally diversified portfolio can be a reasonable option. Eventually, markets do experience dislocations and performance reversals, and unfortunately, these events are difficult to predict with significant accuracy and precision. Furthermore, if global economies do retreat into isolationism, the benefit of being internationally diversified could increase.

In summary, due to the challenges in knowing when an inevitable market correction may occur, Avrio portfolios are built with global exposure as a core element of the strategic asset allocation (SAA), but that exposure may then tactically overweight specific sectors or countries based on contemporary and projected market conditions. Therefore, at the time of this article, Avrio portfolios carry a bias toward the US and a slight underweighting to international markets relative to the MSCI ACWI. Avrio’s balance between the US and international markets is subject to frequent review conditioned upon evolving global economic and geopolitical conditions. 

Sources:

Dziubinski, Susan, and Dan Lefkovitz. 2023. “Why Your Portfolio Needs International Stocks.” Morningstar, Inc. June 28, 2023. https://www.morningstar.com/stocks/why-your-portfolio-needs-international-stocks-2.

Straehl, Philip, and Field, Michael. 2024. “Why Our Best Investment Ideas for 2025 Are Outside the US.” Morningstar, Inc. November 25, 2024. https://www.morningstar.com/stocks/why-our-best-investment-ideas-2025-are-outside-us.

YCharts. n.d. “US GDP as % of World GDP Yearly Analysis: World Development Indicators | YCharts.” Accessed January 8, 2025. https://ycharts.com/indicators/us_gdp_as_a_percentage_of_world_gdp.

Subramanian, Sasirekha. n.d. “The Top 10 S&P 500 Stocks By Weight—A Boon Or Bane?” Forbes. Accessed January 8, 2025. https://www.forbes.com/sites/investor-hub/article/top-sp-500-stocks-by-weight/.

Fidelity Wealth Management. 2024. “International Stocks | Fidelity Investments.” October 24, 2024. https://www.fidelity.com/learning-center/wealth-management-insights/international-stocks.

Manley, Jack. n.d. “International Equities: Is Now the Time to Invest Outside the U.S.?” Accessed January 3, 2025. https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/guide-to-the-markets/portfolio-discussions-international-equities/.

Halliburton, About Benjamin. 2019. “Diversification Is the Only Free Lunch - Forbes Books.” October 30, 2019. https://books.forbes.com/author-articles/diversification-is-the-only-free-lunch/.

Benz, Christine. 2023. “Are International Stocks Worth the Bother?” Morningstar, Inc. June 7, 2023. https://www.morningstar.com/portfolios/are-international-stocks-worth-bother.

Sindreu, Jon. n.d. “What DeepSeek, Russian Sanctions and Guitar Amplifiers Teach Us About Global Competition.” Accessed February 7, 2025. https://advisorstream.com/read/what-deepseek-russian-sanctions-and-guitar-amplifiers-teach-us-about-global-competition/?c=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJub2RlX2lkIjoxODE1OTYsInByZXZpZXciOnRydWUsImNvbW1faWQiOjExODIwNDY1LCJkZXN0X2lkIjpudWxsLCJyZWFkZXJfaWQiOm51bGwsInBlcnNvbmFfcHJldmlldyI6ZmFsc2V9.ZFCPUtNcYZwNjnq9tbZgYl9C-SjZ6a9FqQnyNzJru8s.

Nicastro, Nick. n.d. “The European Commission’s (Anti)Competitiveness Compass.” Accessed February 7, 2025. https://www.msn.com/en-us/money/markets/the-european-commissions-anticompetitiveness-compass/ar-AA1ynZIs.

Dulaney, Chelsey. 2025. “Europe’s Unloved Stocks Are Suddenly on Top of the World.” WSJ. February 8, 2025. https://www.wsj.com/finance/stocks/european-stock-growth-a93373cb.

This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual. Additionally, you should consult with your Financial Advisor, Tax Advisor, or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, or Association. All efforts have been made to report or share true and accurate information. However, the information may become materially outdated or otherwise rendered incorrect due to subsequent new research or other changes, without notice. The author nor the firm are able to always verify the content from third-party sources. For additional information about the firm, please visit the MAS Website at https://www.mas.gov.sg/  and the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm's ADV Part 2 Brochure, please contact us at info@avriowealth.com.