For many investors within the US, it’s easy to think of “the market” as just Wall Street or more specifically particular indices, such as the Dow Jones or S&P 500. However, the truth is that while the US may be the largest market in the world, over a third of the $94 trillion-dollar equity market lies beyond our own borders. That equates to roughly 18,200 companies and $33.4 trillion dollars, making global portfolio diversification a critical strategy for building a resilient, and potentially more profitable, investment portfolio.
What’s more, to see the benefits we don’t have to look far into the past. The “lost decade” began in January 2000 and ran through December of 2009. The S&P 500 index, which has historically seen healthy 10+% annualized returns, experienced a dismal -0.95% annualized return over these 10 years. However, over that same period we saw various international and emerging markets sectors with healthy single, and even double-digit, annualized returns, proving it was possible to make money even as the US market floundered.
Now of course the past 14 years have been dominated by the US market, so we’ve forgotten what came before. We told ourselves that “things are different now” and that international is a losing bet. But as 2025 plays out we’re seeing international take center stage again. While the S&P 500 sits at a comfortable 8+% YTD, the international EAFE index sits at an exciting 22+% YTD. So, while this decade is far from over and no one knows what the rest of 2025 will bring, let alone the next 5 years, it appears that International isn’t out of the race yet.
With that in mind, here’s why you may want to consider global diversification in your portfolio:
1. Reduced Risk Through Diversification: This applies not only to different asset classes (stocks, bonds, real estate) but also to different geographic regions. Economic cycles, political events, and market trends vary significantly from country to country. When one market is struggling, another might be thriving. By diversifying internationally, you can potentially offset a weak market with stronger returns elsewhere, in turn reducing the volatility of your portfolio.
2. Access to Additional Opportunities: With 35% of the world’s equity market located abroad there are many opportunities to be had. Global markets can offer high growth potential due to expanding economies, growing middle classes, and innovative new industries. Limiting yourself to domestic investments means potentially missing out on these significant avenues for wealth creation.
3. Broader Industry Exposure: Certain industries might be more developed or have unique characteristics in different parts of the world. For instance, some countries might be leaders in specific technologies, while others excel in manufacturing or natural resources. International diversification allows you to gain exposure to a wider range of industries and sectors, further enhancing your portfolio’s resilience and potential for growth.
Ultimately, international diversification is about building a more robust and adaptable portfolio that better aligns with markets as a whole. We acknowledge that the global economy is a complex tapestry of interconnected yet distinct markets that we interact with on a daily basis, from the cars we drive, to the foods we eat and the clothes we wear. By strategically allocating investments across this global landscape, and maintaining patience and discipline, we’re put in the best position to find long-term success and meet our financial goals.
