Investing in International Stocks: Is It Worth It?

For U.S. investors, international stocks have lagged domestic equities since 2000, but they still play a crucial role in managing concentration risk. Over the past 25 years, the MSCI USA Index returned about 8.3% annually versus roughly 5–6% for the MSCI EAFE Index and MSCI ACWI ex USA Index. Despite persistent U.S. outperformance, global exposure remains valuable for diversification, currency balance, and access to sector strengths abroad. The goal isn’t to beat the U.S. market, it’s to build a more resilient portfolio.

• Performance gap: Since 2000, U.S. stocks have outpaced global peers by roughly 2.5–3 percentage points annually, driven by tech-heavy composition and stronger earnings growth.
• Key drivers: Sector makeup, currency translation, and economic momentum explain most of the gap in returns.
• Why diversify: International holdings reduce dependence on U.S. market cycles, policies, and the dollar’s direction.
• Practical mix: Many advisors suggest allocating 10–30% of equities to global funds such as MSCI EAFE or ACWI ex USA, balancing hedged and unhedged exposure.
• Bottom line: International investing isn’t a bet on outperformance, it’s insurance against overconcentration, best used with disciplined rebalancing.

U.S. investors face a simple question with a nuanced answer: Is investing in international stocks worth it? The logic is compelling, non-U.S. markets follow different economic cycles, emphasize different sectors, and trade in different currencies, which can enhance diversification and reduce portfolio concentration risk. In theory, that mix can smooth returns when the U.S. economy stumbles. In practice, however, the past 25 years, marked by prolonged U.S. outperformance, have challenged how much diversification benefit investors actually realized.

The score since 2000

To ensure an apples-to-apples comparison, it’s best to use MSCI’s widely tracked indices in U.S. dollars on a net total return basis, which assumes dividends are reinvested after typical withholding taxes. Based on MSCI’s latest fact sheets from a common base date of December 29, 2000, the results are clear:

• MSCI USA Index – annualized about 8.29% (USD, net total return).

• MSCI EAFE Index (developed markets outside the U.S. & Canada) – annualized about 5.25%.

• MSCI ACWI ex USA Index (developed + emerging markets excluding the U.S.) – annualized about 5.67%.

These figures confirm what many investors have observed in their portfolios, persistent U.S. market leadership for more than two decades. Even when factoring in dividends and currency movements, broad international exposure has not matched U.S. equity performance since 2000.

A natural follow-up is whether individual foreign markets tell a different story. Japan, often cited as a turnaround example, illustrates why long-term perspective matters. CME Group research shows the Nikkei 225’s price return since its 1989 peak remains roughly flat in yen and negative in USD terms, a reminder that even powerful local rallies can be muted by currency trends and prior drawdowns.

Why the gap exists

Three main forces explain why U.S. stocks have consistently outperformed international markets since 2000: market composition, currency translation, and economic strength. Together, these structural factors have shaped the long-term gap in global equity returns.

Market Composition

The U.S. stock market became increasingly dominated by high-margin technology and consumer platforms such as Apple, Microsoft, and Amazon. These global giants generated strong earnings growth and scalability, fueling sustained performance over two decades. In contrast, many developed markets outside the U.S., particularly in Europe and Japan, carry heavier exposure to financials, industrials, and materials. These sectors have struggled to deliver consistent growth or profitability, limiting index performance. MSCI’s sector data clearly shows how these structural tilts favored U.S. equities and reinforced their leadership.

Currency Translation

U.S. investors measure returns in dollars, so currency movements play a crucial role. When a foreign currency weakens against the dollar, local market gains can shrink dramatically after conversion. Japan’s long yen depreciation is a prime example, respectable local returns often translated into subdued results in U.S. dollar terms. The opposite also holds true: when the dollar softens, unhedged international holdings can benefit from a currency tailwind. Over the past decade, however, persistent U.S. dollar strength has been a major drag on international equity performance for American investors.

Economic Mix and Earnings Growth

The United States has enjoyed stronger aggregate earnings growth, a larger pool of globally scalable companies, and investors willing to pay premium valuations for innovation-driven firms. Aging populations, slower productivity, and financial-sector constraints have weighed on many developed economies abroad, keeping their earnings growth subdued. According to Cambridge Associates, valuation multiples in the U.S. remain substantially higher than in developed ex-U.S. markets, reflecting this growth premium. Over time, these differences compounded, driving superior long-term returns for U.S. equities relative to global peers.

When going overseas helps

If the last 25 years favored U.S. stocks, why look abroad at all? Because concentration risk is real. The U.S. now accounts for more than half of global equity market capitalization, meaning a 100% domestic portfolio is vulnerable to a single-market shock. International holdings bring exposure to different monetary policies, business cycles, and sector structures. Over time, that mix can smooth portfolio volatility, even if the median year still tilts toward the U.S.

Currency can also work in your favor. When the dollar weakens, often following aggressive tightening cycles or periods of large U.S. fiscal deficits, unhedged foreign assets typically gain as local currencies appreciate. For investors comfortable with moderate currency swings, that’s a diversification benefit that U.S. multinationals alone don’t fully provide.

Some opportunities are simply non-U.S. by design. Europe dominates in luxury and consumer brands, Taiwan and South Korea anchor the global semiconductor supply chain, and Germany and Scandinavia lead in niche industrial technology. A diversified fund such as the MSCI ACWI ex U.S. or MSCI EAFE Index captures these strengths without the need to pick individual countries or companies.

And When It Hurts

There are trade-offs. Currency moves can erase gains, a 10% rise in local shares can be offset if that currency falls 10% against the dollar. Policy and governance frameworks vary widely: some markets feature heavier state involvement or weaker investor protections. International funds often carry slightly higher expense ratios than U.S. funds, and dividend withholding taxes can trim after-tax returns, though net total-return indices attempt to reflect this impact.

Finally, concentrating in single-country positions rather than diversified regional or global funds adds idiosyncratic risk, making volatility more likely just when stability matters most.

How much, and should you hedge?

A practical approach for U.S. investors is to think in terms of modest diversification rather than a major shift, typically allocating about 10–30% of their equity portfolio to international markets. This can be achieved through a total-international index fund similar in scope to the MSCI ACWI ex USA Index or a developed-markets fund such as the MSCI EAFE Index. These vehicles offer diversified exposure across regions and sectors, removing the need to time specific countries or currencies.

On currency, hedged funds aim to neutralize foreign-exchange movements so that returns mirror local equity performance in U.S. dollar terms. This typically reduces volatility but also eliminates the potential upside when the dollar weakens. For long-term diversification, maintaining a mix, some unhedged core exposure complemented by a smaller hedged sleeve, can provide balance between stability and opportunity.

Whatever allocation you choose, disciplined rebalancing is essential. The past 25 years show that U.S. outperformance can persist for extended periods; without periodic adjustments, a once-global portfolio can quietly drift into a U.S.-heavy stance that undermines diversification goals.

So—is it worth it?

If by “worth it” you mean “likely to outperform U.S. stocks,” the evidence since 2000 says not reliably. The MSCI USA Index has delivered roughly 8% annualized returns, compared with about 5–6% for the MSCI EAFE Index and 4.5–5.5% for the MSCI ACWI ex USA Index on a net total return basis. That’s a meaningful compounding gap over two decades.

If instead you define “worth it” as portfolio resilience, the answer shifts. International stocks expand exposure across diverse economies, sectors, and currencies, reducing single-market concentration. They can help cushion U.S.-centric portfolios when leadership rotates globally. The key is using them deliberately, set a balanced allocation, pick low-cost diversified funds, decide whether to hedge currency risk, and rebalance periodically.

In short, international investing is a diversification tool, not a shortcut to outperformance. It’s worth it when it strengthens your overall plan, not as a wager that “this time” the rest of the world will finally beat the U.S.