If you’ve ever built a Lego set, you know the temptation. You start with a big pile of colorful bricks, and for some reason, you always seem to reach for the red ones first. They’re familiar, they’re right in front of you, and you know exactly how they fit. For many investors, the stock market works the same way. Our "home country" stocks—those from the United States for American investors—are the red bricks. They’re familiar, heavily covered in the news, and feel safe.
This tendency is called “home country bias,” and it’s one of the most common and potentially costly mistakes an investor can make. It leads to the critical question we’re tackling today: What percentage of your portfolio should be in international stocks?
For decades, a simple rule of thumb was offered up, but the modern financial landscape is more complex. There is no single magic number that works for everyone. However, by understanding the arguments for and against global diversification, you can determine the right percentage for your own financial journey.
The Compelling Case for Going Global
Before we discuss percentages, we have to ask: why bother with international stocks at all? The U.S. market has been a phenomenal performer for over a decade. Why not just keep all your money there? The answer lies in three powerful benefits: diversification, growth potential, and opportunity.
1. True Diversification The cornerstone of smart investing is diversification—not putting all your eggs in one basket. While investing across different U.S. companies and sectors is good, investing across different countries is even better. Global economies don’t move in perfect lockstep. When the U.S. market is in a slump, other markets—like those in Europe or Asia—might be thriving. By holding international stocks, you cushion your portfolio against a downturn in any single country. It’s the ultimate hedge against regional recessions, political instability, or market bubbles specific to your home turf.
2. Access to New Engines of Growth While the U.S. is home to many of the world's most innovative companies, it's not the only place where growth happens. Some of the most exciting consumer, technological, and industrial expansion is occurring outside our borders. Think about the rising middle class in Southeast Asia, the technological prowess of South Korea and Taiwan, or the vast natural resources of Australia and Canada. By ignoring international markets, you’re turning your back on a significant portion of the world’s economic growth engine.
3. Owning the World’s Best Companies Many of the world’s dominant and most respected brands are not listed on a U.S. exchange. From the world’s largest automaker (Toyota) and the leading maker of semiconductors (ASML in the Netherlands) to consumer giants like Nestlé and LVMH, a portfolio without international stocks is simply incomplete. You only get to own a piece of global leadership if you look beyond your home market.
The Old Rule of Thumb: 20-30%
For years, the standard advice from financial advisors was simple: allocate 20-30% of your stock portfolio to international holdings. This rule was logical for its time. It was based on the idea that you should have a globally balanced portfolio but also acknowledge your natural home-country connection (living, earning, and spending in U.S. dollars).
However, this rule is now being heavily debated. The primary reason for the debate is the staggering growth and outperformance of the U.S. market. Over the last 15 years, the U.S. has grown to represent approximately 60% of the total global stock market capitalization. This has led to two very different and compelling modern approaches.
Modern Frameworks for Your International Allocation
Given that the old rule is up for discussion, here are three modern frameworks you can use to decide your percentage.
Approach #1: The Market-Cap Weighting Method Proponents of this approach argue for a truly "global" portfolio. The logic is that if you want to own a slice of the world economy, your portfolio should mirror the world’s market capitalization. Based on today’s numbers, this would mean a portfolio split of roughly 60% U.S. stocks and 40% international stocks.
- Who it’s for: The disciplined investor who wants a simple, objective, and data-driven allocation. This approach treats the U.S. as just another part of the global market, avoiding emotional or patriotic bias.
Approach #2: The "U.S. Exceptionalism" Method This approach is a direct reaction to the last decade of performance. Adherents believe that U.S. companies, due to their innovation, capital efficiency, and strong legal framework, are likely to continue outperforming their international peers. They advocate for a much lower international allocation, often in the 10-20% range—just enough to get the diversification benefits without overly diluting the potential for U.S. growth.
- Who it’s for: The optimistic U.S.-centric investor who is willing to bet that America’s market dominance will continue. This approach requires strong conviction, as a prolonged period of international outperformance would significantly lag this strategy.
Approach #3: The Strategic Flexibility Method This is arguably the most pragmatic approach for most people. Instead of a fixed number, you choose a range and adjust based on your personal factors. A good starting point might be the classic 20-30%, but you then consider:
- Your Age and Risk Tolerance: A younger investor with a long time horizon might comfortably hold 30-40% in international stocks, with a healthy chunk in higher-growth (but higher-volatility) emerging markets. An investor nearing retirement might prefer a more conservative 20% allocation, focused on stable developed markets like Europe and Japan.
- Your Economic Outlook: If you believe the U.S. dollar is strong and U.S. stocks are overvalued, you might temporarily tilt your portfolio toward a higher international allocation. Conversely, if global turmoil is on the horizon, you might feel more comfortable with a higher U.S. weighting. (Warning: This borders on market timing, which is notoriously difficult to pull off consistently.)
- Your Own Peace of Mind: This is crucial. If a 40% international allocation will cause you to panic and sell during a European market crash, it’s too high for you. The right allocation is one you can stick with for the long term, through both bull and bear markets.
Practical Tips for Implementation
Once you decide on your target percentage, the implementation is straightforward. For the vast majority of investors, the best way to gain international exposure is through a low-cost, broadly diversified index fund or ETF.
- A Total International Stock Fund: This is the simplest option. Funds like Vanguard’s Total International Stock ETF (VXUS) or iShares Core MSCI Total International Stock ETF (IXUS) give you exposure to thousands of stocks in both developed and emerging markets in a single purchase.
- Developed vs. Emerging Markets: If you want more control, you can split your international allocation. A common guideline is to have 70-80% in developed international markets (Europe, Japan, Australia) and 20-30% in emerging markets (China, India, Brazil, etc.).
Finally, remember to rebalance your portfolio once a year. If your international stocks perform well and grow to 45% of your portfolio when your target was 30%, you’d sell some international stocks and buy U.S. stocks to get back to your target.
Finding Your Perfect Global Balance
So, what percentage of your portfolio should be in international stocks? The honest answer is a resounding, “it depends.” The old 20-30% rule of thumb is a perfectly reasonable and safe starting point. But you now have the context to push that number higher to match the global market, or lower it based on your conviction in U.S. businesses.
The most important step is to consciously make a decision. Don’t let default bias dictate your financial future. By thinking globally, you open your portfolio to a world of diversification, growth, and opportunity that no single country can offer on its own. That’s a recipe for a more resilient and potentially more rewarding investment experience.