Asset classes

Making the case for international equity allocations

May 05, 2023

The structural case for international diversification: Lower expected volatility
The cyclical case for international exposure: Higher expected returns

U.S. stocks are unlikely to repeat their past outperformance over the coming decade

A series of bar charts show the performance of U.S. stocks and international stocks from April 1, 2013, to March 31, 2023, and projections of U.S. and international stock performance from 2023 through 2033, with the difference in returns broken out by factor.  Over the past decade, international stocks returned 4.7% on average per year. In comparison, U.S. stocks returned 12.2% on average per year, or 7.5 percentage points more on average. The U.S. outperformance breaks down as +3.3% for valuation expansion, +3.2% for earning growth, –1.1% for dividend yield, and +2.1% for foreign exchange returns.  Over the coming decade, U.S. stocks are expected to return 5.1% on average per year. In comparison, international stocks are expected to return 7.3% on average per year, or 2.2 percentage points more on average. The international outperformance breaks down as +0.4% for valuation expansion, –0.7% for earning growth, +1.4% for dividend yield, and +1.1% for foreign exchange returns.
More headwinds than tailwinds for the U.S.
International allocation: How much is enough?

International stocks outperform in most, but not all, of our outcome simulations

A scatter plot shows 10,000 simulations for annualized returns over the next decade for U.S and international equities. While over half of the simulations point to international equities outperforming, a substantial minority of simulations show U.S. equities outperforming.
The takeaway
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Contributor

Ian Kresnak
Vanguard Information and Insights

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