There's a question that comes up in every investing community, every Boglehead forum thread, every Reddit finance debate, on a weekly basis: Should I invest internationally, or is US-only good enough?
It's a genuinely interesting question because both sides have compelling arguments, and because the honest answer is "it depends on which 30-year window you're looking at." If that's frustrating, welcome to investing — where the correct answer is often deeply unsatisfying in the short term and only becomes obvious in retrospect.
Let's walk through the real case for international diversification, the honest case against it, and what we think you should actually do.
The US Has Been Dominant. And That's Exactly the Problem.
Here's the bullish US-only case: American stocks have crushed international stocks for most of the past 15 years. The S&P 500 has outperformed the MSCI EAFE (the main international developed markets index) dramatically over the period from roughly 2010 through the mid-2020s. The US economy has been more innovative, more profitable, and more dynamic than Europe, Japan, and most of the developed world. Why dilute your winners with losers?
It's a seductive argument. And it's the same argument Japanese investors made in the late 1980s.
Japan's stock market peaked in December 1989 at nearly 39,000 on the Nikkei index. By the mid-1990s it had lost over 60% of its value. For two decades — a period called Japan's "Lost Decade" (which was actually closer to two lost decades) — Japanese stocks delivered near-zero or negative real returns. The country's equity market didn't return to its 1989 peak until 2024. That's 35 years of investors who put everything into the dominant market and watched it stagnate.
Think Japanese investors in 1988 thought their home market could enter a multi-decade slump? Of course not. Their economy was the envy of the world. Their companies were gobbling up American real estate. The Nikkei had returned extraordinary gains for decades. There was no conceivable reason to diversify into less impressive markets.
That's exactly the argument US investors are making right now.
The Academic Case: Markets Lead and Lag in Long Cycles
The data on international diversification isn't as clean as advocates sometimes make it sound, but the structural argument is solid.
Research on home bias — the tendency of investors to overweight their home country's stocks — consistently shows that investors across all countries hold far too little international exposure for an optimally diversified portfolio. French and Poterba's foundational 1991 work showed that US investors allocated over 95% of their equity portfolios to domestic stocks, despite the US representing less than 50% of global market cap at the time.
Today, the US represents about 60-65% of the MSCI All Country World Index. US investors often allocate 80-90%+ of their equities to domestic stocks. That's still a substantial home bias, even if the US is a bigger share of the global market than it was in 1991.
The risk of home bias isn't just about Japan-style catastrophes. It's about concentration. When you're 90%+ in US stocks, your portfolio lives and dies with the US economic cycle, US monetary policy, and US political risk. International diversification doesn't necessarily mean higher returns — it means lower correlation, which means smoother long-term outcomes.
Paul Merriman's Ultimate Buy and Hold research specifically highlights international small cap value as a diversification source that has historically added both return and diversification benefit. AVDV (international small cap value) has delivered a five-year annualized return of 15.89% — comparable to or better than comparable US factor ETFs over the same period, while providing exposure to completely different economic cycles.
The Honest Counter-Arguments
International diversification has real costs and real complications. Let's not pretend otherwise.
Currency risk: When you hold international stocks, you're also holding foreign currencies. If the dollar strengthens significantly, your foreign returns are reduced when converted back to dollars. This has been a headwind for international investing over extended periods.
Political and regulatory risk: International markets carry country-specific risks — governance issues, regulatory uncertainty, geopolitical instability — that US stocks don't face to the same degree. Emerging markets especially can be subject to sudden policy changes that devastate specific sectors or companies.
The US earnings are global anyway: Apple generates revenue in 180 countries. Microsoft, Amazon, Google, and virtually every large US company is a global enterprise. Some argue that owning VTI already gives you substantial international economic exposure through the global revenues of US multinationals. This is partially true — but the correlation between US stock prices and international stock prices during crises suggests that the "global revenue hedge" argument has limits.
Extended underperformance: International stocks have underperformed US stocks for stretches long enough to genuinely test investor conviction. Holding AVDV when VTI is dramatically outperforming requires a level of commitment to long-term diversification principles that many investors find difficult to maintain behaviorally.
The US as 30% of global market — not so long ago
One more data point worth sitting with: the US represented less than 30% of the global equity market in the 1970s. Today it's over 60%. That extraordinary rise in US market dominance — driven by the tech revolution, favorable monetary policy, and the dollar's reserve currency status — is exactly the kind of historical anomaly that tends to mean-revert over long periods. Betting that the US will continue its dominance indefinitely is a bold, concentrated prediction about the future. International diversification is simply the acknowledgment that you don't know which country will dominate the next 30 years, and neither does anyone else.
What to Actually Do
Here's the VTI & Chill take, grounded in the research:
If you're a Good portfolio investor (VTI only): You're fine. US-only is a legitimate, defensible strategy. You own the most profitable, most liquid, most dynamic stock market in the world. Accept the home bias as a known feature, not a bug, and move on.
If you're a Better portfolio investor (adding factor tilts): Consider adding 10-15% international exposure, ideally in AVDV (international small cap value, 0.36% expense ratio). This gives you factor-tilted international exposure that complements your US factor tilts without overly complicating the portfolio.
If you're a Best portfolio investor (Merriman-inspired global diversification): Build meaningful international exposure, including AVDV, AVDS, AVES, and optionally AVEE. This mirrors Merriman's research on the return benefits of diversifying factor premiums globally. The total international allocation might be 25-35% of your equity portfolio.
| Portfolio Tier | International Allocation | Vehicle |
|---|---|---|
| Good (VTI only) | 0% | Skip — simplicity wins |
| Better (factor tilts) | 10–15% | AVDV |
| Best (Merriman-inspired) | 25–35% | AVDV + AVDS + AVES + AVEE |
The behavioral challenge is real
International diversification requires accepting extended underperformance relative to a US-only benchmark. From roughly 2010 to the mid-2020s, international stocks trailed US stocks significantly. An investor who added 20% AVDV during that period watched it consistently drag their overall returns versus pure VTI. The research says this is rational diversification. Your brokerage app — showing your international allocation in red while VTI is green — will not feel rational. Be honest with yourself about whether you can hold international exposure through multi-year underperformance cycles before adding it.
The Bottom Line
International diversification isn't about pessimism toward the US. It's about intellectual humility — acknowledging that today's dominant market can become tomorrow's lost decade, and that spreading your bets across the global economy is rational risk management.
Japan peaked in 1989. US investors who were 100% domestic in 1989 were fine because they happened to be in the right country at the right time. Your portfolio shouldn't depend on being lucky about which country wins over the next 30 years. The US represented less than 30% of global market cap in the 1970s and over 60% today — that kind of anomalous dominance historically mean-reverts.
At minimum: acknowledge the home bias, understand the arguments for and against international exposure, and make a deliberate choice rather than defaulting to 100% US out of familiarity and recent performance bias. For most investors building the Better or Best portfolios, AVDV is the cleanest first step into meaningful international diversification.
Disclaimer: VTI & Chill provides financial EDUCATION, not personalized financial ADVICE. We are not licensed financial advisors. All content is for informational and educational purposes only. Past performance does not guarantee future results. Always do your own research and consider consulting a qualified financial professional before making investment decisions. All investing involves risk, including the possible loss of principal.