If you’re happy with everything in your portfolio, it’s a good sign that you're not diversified. (UBS)

The US stock market has become increasingly expensive and concentrated in a handful of stocks and sectors. Moreover, US stocks already make up 62% of the global stock market by market capitalization.

We see five key factors that are likely to drive international stock market outperformance in the years ahead: valuations, profitability, growth, currency, and interest rate risk.

Because of these headwinds—and the risks that come from under-diversification—we recommend that investors maintain a globally diversified portfolio, with around 40% of their stock allocation in international developed and emerging market stocks.

Here are 5 reasons to add international assets to your portfolio:

  1. If you’re happy with everything in your portfolio, it’s a good sign that you're not diversified. A globally diversified approach can help you to own tomorrow’s leaders and limit your exposure to tomorrow's laggards.
  2. Global diversification can help you unlock opportunities. We studied the returns of 41 international markets going back to 1998. Sixteen countries’ markets outperformed the US, with a median outperformance of 334% (approximately 6% per year).
  3. Diversification can help you protect against risk. Over-allocating to a single stock market exposes you to increased risk. Tapping into international economies and markets that aren't in lockstep with the US can help you to enhance your portfolio’s risk-adjusted return potential.
  4. We expect international stocks to outperform going forward. UBS Capital Market Assumptions give international equities an 8.1% expected annual return versus just 5.7% for US large-cap stocks, which should lead to significant outperformance over the next market cycle.¹
  5. A US-only approach is likely to be costly. When compared to a globally diversified balanced portfolio, we would expect a US-only portfolio to deliver a roughly 20% lower average annualized return, and take longer to recover from losses due to stock and sector concentration risks.

For more, see the presentation, Why bother investing beyond the US?

¹Based on Compound Strategic Capital Market Assumptions. Source: UBS Wealth Management USA Asset Allocation Committee, as of 5 February, 2024.