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The Hidden Risk of U.S. Stock Dominance
What if I told you that investing only in U.S. stocks might be one of the riskiest decisions for your portfolio?
It sounds counterintuitive, right? The S&P 500 has dominated for years, delivering massive returns. But history tells us that no market stays on top forever. The question isn’t whether U.S. stocks will slow down—it’s when.
And when that happens, will your portfolio be ready?
Many investors today are questioning the need for diversification, especially after years of U.S. stock market dominance. But outperformance never lasts forever. Markets are cyclical. And with valuation spreads between U.S. stocks and international markets continuing to widen, the long-term opportunity for global diversification has never been greater.
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The Psychological Trap: Recency Bias and U.S. Stocks
It’s no secret that international stocks haven’t kept pace with U.S. stocks in recent years. In 2024 alone, international stocks—measured by the MSCI World ex USA Index—lagged U.S. stocks by nearly 20 percentage points. Over the last decade, the U.S. outperformed international markets by over 7% per year.
No wonder investors are asking: Do we even need international stocks anymore?
But this skepticism is driven by recency bias—the tendency to assume recent trends will continue indefinitely.
Behavioral finance experts Amos Tversky and Daniel Kahneman call this representativeness bias—where investors mistake short-term patterns for long-term realities.
History proves otherwise. Markets move in cycles. And there have been long stretches where international stocks outperformed U.S. stocks:
- 1970-2011: International stocks delivered better returns than U.S. stocks.
- 2001-2011: U.S. stocks underperformed international stocks by more than 2.5% annually.
And I remember those conversations with investors back then—everyone wanted more international exposure. Now that U.S. stocks have been leading, the trend has reversed.
The takeaway? Short-term trends don’t define long-term performance. The more returns fluctuate across asset classes, the more valuable diversification becomes.
The Case for Global Diversification
This isn’t the first time the S&P 500 has dominated—and it won’t be the last. History shows that U.S. outperformance is often followed by stretches where other asset classes take the lead.
And let’s not forget—there have been long periods where U.S. stocks underperformed even the safest assets:
- 1929-1943 (15 years): Cash outperformed U.S. stocks.
- 1966-1982 (17 years): U.S. stocks struggled while bonds and cash performed better.
- 2000-2012 (12 years): U.S. stocks produced essentially zero returns, while international stocks, emerging markets, and bonds performed far better.
Imagine being fully invested in U.S. stocks during one of these periods. How long would you be able to stick with your strategy while watching other markets outperform?
This is where diversification plays a critical role. It’s not about chasing winners—it’s about ensuring your portfolio can weather all market conditions.
The Risks of Overweighting U.S. Stocks
Many investors assume that sticking to U.S. stocks is the safest choice. But that assumption comes with major risks:
- Overconcentration Leaves You Vulnerable – Betting on a single market is risky. No market leads forever.
- The U.S. Market Is Not Immune to Downturns – Even the strongest bull runs eventually correct.
- International Markets Offer Unique Opportunities – Higher dividend yields, lower valuations, and different economic cycles can enhance returns and reduce risk.
A globally diversified portfolio ensures that when the tides shift—as they inevitably do—you’re positioned to capture returns wherever they occur.
Why Diversification Feels Like Losing (Even When It’s Winning)
At its core, diversification is about risk management and regret minimization.
But here’s the reality: diversification never feels good in the short term.
Why? Because there will always be parts of your portfolio that underperform. That’s hard to accept when one asset class—like U.S. stocks—appears to be winning year after year.
📌 Source: JP Morgan Asset Management, Guide to the Markets
The behavioral challenge is this:
- We don’t regret choosing U.S. stocks when they underperform—because they feel familiar.
- But we do regret choosing international stocks when they underperform—because we feel responsible for making an “active” decision.
But the solution isn’t to abandon international exposure. The solution is to normalize it.
When international stocks become a permanent part of your portfolio, you stop viewing them as an “alternative” and start seeing them as an essential component of a long-term strategy.
📌 Source: BlackRock Student of the Market
The Hidden Benefits of Global Diversification
Here’s a simple way to think about it:
Imagine you’re at the start of 2024. You know that one market—U.S. or international—will deliver a 24.6% return, while the other will return just 4.7%. But you don’t know which is which.
A 50-50 globally diversified portfolio guarantees you a 14.6% return—which is lower than the winner but far better than the loser.
That’s how diversification works: you give up the highest highs to avoid the lowest lows.
Final Thoughts: Why You Should Stay Globally Diversified
If you’ve been questioning whether diversification is still worth it, you’re not alone. The temptation to go all-in on U.S. stocks has never been stronger.
But history, valuations, and common sense all point to the same conclusion: staying diversified is the best way to protect your long-term wealth.
📌 The next decade won’t look like the last one. The question is: Will your portfolio be ready?
If you want to protect your long-term wealth, make sure your portfolio is built for all market conditions—not just the one we’ve been living in. Let’s talk about your strategy. Schedule a call with me at www.callwithpeter.com today.
Resources:
The Long Term Investor audio is edited by the team at The Podcast Consultant
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