This home bias is unfortunately not limited to the everyday investor. Institutional portfolios and fund managers can also be subjected to home bias. This is why it’s important to understand the benefits of international investments and how to add them to your portfolio.

Benefits Of International Investments

In the not-too-distant past, the S&P 500, which is a collection of the 500 largest publicly-traded companies in the United States, experienced a time called “the lost decade.” During this 10-year period between January 2000 and December 2009, average annualized returns of the S&P 500 were -.95%. International stocks in both developed and emerging markets outperformed the U.S. during this time. So, if you’d had an internationally diversified portfolio, you may not have seen negative returns during this time.

That was followed by a decade of fantastic returns in the United States market, averaging 13.56% per year for the next ten years. During that time, international stocks underperformed by about 7%. So, recent history is clearly not an indication of future performance.

Enhanced Returns And Unique Opportunities

Most investors inherently know they should be aiming to buy investments when the market is low and sell investments when the market is high. In practice, fear and greed can lead investors to make the wrong choices and buy investments that have been rising and might be overvalued, while they sell investments that have gone down.

Because of the United States’ recent outperformance, many stocks’ price-to-equity ratios are high. That means stocks, especially large company stocks in the United States, are selling at a high price compared to what the companies bring to the table. This doesn’t necessarily mean that the stocks will go down, but it could mean that there are opportunities for outperformance and enhanced returns in areas where those price-to-book ratios are lower, such as international markets.

The United States is considered a developed nation, and as such, the stock market usually works efficiently. This means it is very difficult to gain an edge in the market because all publicly available information is reflected in the prices you see. In emerging marketplaces, there can be less eyes on each stock so it may be possible to gain an edge. In theory, the emerging market stocks could have endless upside because the economy has potential to develop quickly and make leaps and bounds in progress.

Risk Reduction

Diversification reduces risk. Any time you have two assets in an investment portfolio that are not 100% correlated, then you get diversification benefits. International stocks are often going to have less correlation to a U.S. stock than another U.S. stock so therefore, you gain greater diversification benefits.

Strategies For Including International Investments

Today, it is extremely cost effective to diversify your portfolio internationally.

Types Of International Investments

International investments, like U.S. investments, come in a variety of sectors and sizes. Here are some you can find:

• International Large Cap Growth
• International Large Cap Value
• International Small Cap Value
• International Small Cap Growth
• International Real Estate
• Emerging Markets

There are many more types of funds, but this will give you an idea. The size next to the word cap refers to market capitalization, or shares of the company outstanding multiplied by the price of the shares. The growth and value descriptions refer to either the price to equity ratio or the price to book ratio. Essentially, more expensive companies are labeled as growth companies whereas cheaper companies are labeled as value companies.

According to Nobel prize-winning economist, Eugene Fama, smaller companies and cheaper companies tend to have an edge over larger, more expensive companies over time.

Considerations

If you look at the composition of international index funds, many tend toward the larger growth companies. Another thing to be aware of is that sometimes, international or global funds will include investments in the United States. Since you likely already have U.S. funds in your portfolio, you may want to ensure that funds you add to increase diversification do not include United States stocks.

I prefer to weight portfolios in accordance with global market capitalization, which can change year-to-year. According to data published by NYU Stern, the United States was about half of the global market capitalization at the beginning of 2025, followed by China and the EU. So, if you’re investing completely in the United States, you’re missing out on about half the world of opportunity.

Another consideration for investing abroad is that you may end up paying higher taxes on dividends from stocks in your portfolio. If you have a taxable portfolio, you may want to consider stocks and funds more focused on capital gains than distributing dividends.

There can also be unique risks, including currency or exchange rate risk and political risks particularly if the country you are investing in faces some instability or unrest.

Conclusion

Including international investments in your portfolio can mitigate home bias and provide diversification benefits, reducing risk and potentially enhancing returns. By exploring diverse global markets, investors can access unique opportunities unavailable in the U.S. Despite challenges like currency and political risks, a balanced international approach can optimize long-term growth and resilience.