Why International Stocks Still Matter: Diversifying Beyond US Winners in 2026
I’ve long been a proponent of portfolio diversification, including holding international stocks. Yet international stocks have badly trailed US stocks over the past decade, and many have given up on international investing. Over the decade ended Dec. 31, 2025, US stocks clocked an annual 14.42% return, nearly quadrupling in value, while international stocks returned 8.54% annually or only about 2.3 times the original investment. Both are measured with total return (including dividend reinvestments) of the two largest total stock index funds (across all share classes), Vanguard Total Stock Market Index ETF VTI and Vanguard Total International Stock Index ETF VXUS.
However, 2025 was a bit of a different story. While VTI was up a healthy 17.1%, VXUS surged 32.35%. As I create plans for new clients, it’s suddenly much easier to get them to agree to hold an international equity. That, of course, is irrational because it was a much better relative value a year ago.
Why US Stocks Outperformed
Admittedly, I’m a lot better at explaining the past than predicting the future, but I think it’s important to first understand why the US outperformed the rest of the world over the past decade. It’s not that international equity has performed poorly; it’s that the US has performed spectacularly.
The US stock market’s stunning return was driven by large-cap growth technology companies such as the Magnificent Seven. Do you remember that a decade ago, many argued large-cap growth was overvalued and small-cap value was the place to be? Things change, and that’s the lesson. International countries have far fewer technology and mega-cap growth companies than the US, and tech won’t always be the star industry.
By my calculations, using data from CompaniesMarketCap.com, the 10 most valuable companies (largely tech) accounted for nearly 36% of the total value of the entire US stock market as of Dec. 31, 2025. Those companies largely drove the remarkable returns of the US stock market.
Another reason that international stocks underperformed the US is the fact that the rest of the world has seen bloody and economically costly wars, namely in Ukraine and the Middle East. That may be why the US dollar surged until 2025 as the euro and other currencies declined in relative value.
3 Reasons to Own International Stocks
Now that I’ve tried to explain the past, let me state the case for international stocks:
1) Concentration Risk Is High
I’ve used the portfolio diversification argument for decades, but now, with a handful of US companies representing such a huge portion of the value of US stocks, concentration risk is at an all-time high. It’s not that I think another tech bubble is coming—unlike those dot-com companies of 1999, these tech companies are profitable. However, for a variety of reasons, some of these companies could falter.
Though recency bias makes us believe that US tech companies will remain the most valuable, history teaches us that this will not likely be the case. This video compresses the past 27 years as companies and sectors rise and fall. It’s very unlikely that the current list of the most valuable companies will remain. I know that I don’t know which companies from which countries or regions will be in the list a decade from now.
2) Sectors Shift
Relative values of sectors change over time. I’m old enough to remember when energy was dominant, and now it only accounts for about 3% of the US stock market valuation. I don’t know what sector will be dominant in a decade, but from the chart above, international stocks have a higher concentration in most other sectors outside of technology and communications services. The latter are composed of companies like Alphabet GOOG and Meta Platforms META, which are heavily tech-focused, including artificial intelligence. The point is that the next rising sector is likely to be concentrated outside of the US.
3) The US Lacks Financial Discipline
US debt is mushrooming as ever-increasing deficits add to the amount of interest paid. When I’m asked by clients how I think this issue will play out, my answer is, “I don’t know, but I sure am worried.” It’s not that all other countries are more disciplined, but only the US has the dollar as the world’s reserve currency. Thus, the US has further to fall if the world loses faith in the dollar.
How to Invest in International Stocks
While I have some knowledge of which countries have a brighter outlook than others, I likely know less than what’s already priced into the market. Thus, I recommend low-cost broadly diversified total international stock index funds such as VXUS or iShares Core MSCI Total International Stock ETF IXUS. Broader is better, and low costs are essential. Each owns thousands of companies and has ultralow expense ratios.
I typically recommend the stock portion of a diversified portfolio be about two-thirds US and one-third international stocks. But whatever you pick, it’s important to be consistent. If you previously jettisoned international stocks and are now considering going back in, I suspect you may be chasing performance and won’t stay the course. Morningstar’s Mind the Gap research demonstrated that investors in international stock funds underperformed the funds themselves by 1.1 percentage points annually over the 10 years ending Dec. 31, 2025. In other words, we are really good at timing markets and investments really poorly. Consistency is more important than choosing your allocations to any asset class, so rebalancing back to your target is key, even if you have to pay taxes.
My advice is to own the world in 2026 and beyond.
