Why Your Retirement Portfolio Probably Needs More International Stocks

After a decade of U.S. dominance, Vanguard, Robert Shiller, and Bank of America are all pointing the same direction. The most dangerous position in investing is the one that worked so well for so long that you forgot it was a bet.

If you’re approaching retirement or already there, and your international stocks retirement portfolio allocation is close to zero, you’re not alone. After 15 years in which the S&P 500 returned an average of 14.8% annually, most American investors quietly let their foreign holdings dwindle. International felt like dead weight. The S&P 500 felt like the only bet worth making.

That assumption is now one of the bigger risks sitting inside retirement portfolios. Not because U.S. stocks are doomed, but because three things happened at once: valuations hit levels not seen since the dot-com bubble, performance reversed sharply in favor of international markets, and the structural case for foreign outperformance got materially stronger.

In 2025, the MSCI World ex USA index returned 32.6% while the S&P 500 returned 16.4%, a gap of more than 16 percentage points. That’s not a rounding error. And every major research house, from Vanguard to Fidelity to Charles Schwab, is now publishing outlooks suggesting this isn’t a one-year fluke.

The Decade That Made Everyone Forget

Since 2009, the S&P 500 has produced total returns at an average annual rate of 14.8%. That’s well above the index’s long-term historical average, and it’s the kind of performance that makes everything else look pointless in hindsight. U.S. large-cap stocks, and particularly U.S. tech stocks, dominated so thoroughly that international diversification felt like a drag on returns.

But the mechanism behind that outperformance matters more than the result. Stock prices in the S&P 500 climbed more than twice as fast as cumulative earnings-per-share growth since 2009. In other words, much of the return came from investors paying higher and higher multiples for the same earnings, not from the earnings themselves growing at extraordinary rates.

That brings us to where we are today. The Shiller CAPE ratio, which uses long-term inflation-adjusted earnings to value the overall market, has climbed above 40. The only other time it reached that level was at the height of the dot-com bubble. Large-cap U.S. stocks trade at nearly 22 times forward earnings expectations. Meanwhile, non-U.S. stocks are roughly 35% cheaper than U.S. stocks on a forward price-to-earnings basis, according to Fidelity’s analysis.

Why the Numbers Are Shifting for International Stocks in Retirement

Robert Shiller, the Nobel Prize-winning economist who developed the CAPE ratio, published his 10-year return forecasts in early 2026. His numbers are striking. For the S&P 500, he projects average annual nominal returns of just 1.5% over the coming decade. At that rate, investors wouldn’t keep up with inflation. For European stocks, his forecast is 8.2% per year. For Japanese stocks, 6.5%.

Those aren’t the projections of a perma-bear. Shiller’s 95% confidence interval for U.S. returns includes the possibility of 10.7% average annual returns, roughly in line with the S&P 500’s historical average. But it also includes potential average returns of negative 7.7%. The wide range itself tells you something about how stretched current valuations are.

Vanguard’s 2026 economic and market outlook lands in similar territory, though with less dramatic numbers. Vanguard projects U.S. equities will return 4% to 5% annually over the next five to ten years. For international developed-market equities, Vanguard’s projection is 4.9% to 6.9%. The gap isn’t enormous, but compounded over a decade of retirement withdrawals, it could meaningfully affect how long a portfolio lasts.

Metric	U.S. Equities	International Equities
Vanguard 10-year projected return	4%–5% annually	4.9%–6.9% annually
Shiller 10-year projected return	1.5% annually	6.5%–8.2% annually
Forward P/E discount (non-U.S. vs. U.S.)	Baseline	~35% cheaper
2025 total return	16.4% (S&P 500)	32.6% (MSCI World ex USA)
CAPE ratio vs. historical average	Above 40 (dot-com levels)	Near long-term averages

Vanguard attributes its muted U.S. forecast almost entirely to the risk-return profile of large-cap technology companies. Their expected earnings are already priced for near-perfection, and Vanguard’s research team argues that creative destruction from new competitors will erode aggregate profitability over time, even if AI delivers on its economic promise.

The AI Argument Most Investors Are Missing

Here’s the part that surprises people: artificial intelligence may actually be better for international stocks than for U.S. stocks. The conventional wisdom is that AI is a U.S.-dominated story, and in terms of the companies building AI models, that’s largely true. But the economic value of AI, meaning the productivity gains from deploying it, flows disproportionately to manufacturing and production-oriented economies.

Bank of America’s chief global strategist Michael Hartnett made this argument in early 2026. The U.S. economy is approximately 73% services and only 16% manufacturing, according to the Federal Reserve. AI-driven automation and efficiency gains are far more valuable in a factory setting than in a restaurant or retail environment where the work still depends on human interaction. Countries like China, Germany, Japan, and South Korea, with their larger manufacturing sectors, are positioned to capture more of AI’s economic upside.

Hartnett’s team concluded that this dynamic could help foreign stocks outperform domestic stocks for a full decade. That’s a structural argument, not a cyclical one. It doesn’t depend on any single year’s earnings or any particular trade policy.

Fidelity’s portfolio managers reached similar conclusions from a different angle. They see the global AI supply chain as a major opportunity set that most U.S.-focused investors overlook entirely. Taiwan Semiconductor manufactures Nvidia’s most advanced chips. ASML in the Netherlands is the world’s dominant supplier of the lithography machines used to make those chips. Japan’s Advantest is a leader in semiconductor testing equipment. These companies aren’t AI sideshows. They’re the infrastructure AI runs on.

What This Means During Retirement Distributions

Valuation and performance arguments apply to all investors, but they hit differently for people in or near retirement. When you’re drawing down a portfolio rather than adding to it, you can’t afford to wait out a lost decade. Sequence of returns risk, the danger that poor early returns permanently impair a portfolio’s longevity, is the defining risk of the distribution phase.

If U.S. stocks deliver something closer to Shiller’s 1.5% or even Vanguard’s 4% to 5% over the next decade, a portfolio that’s 90% domestic equities will face real pressure during annual withdrawals. International diversification doesn’t eliminate sequence risk, but it reduces the chance that your entire equity allocation moves in lockstep during a U.S.-specific downturn.

This is the practical argument for global diversification in retirement. It’s not about chasing last year’s winner. It’s about building a portfolio that doesn’t depend on any single country’s stock market delivering above-average returns at the exact moment you need it to.

The Behavioral Trap That Costs Investors 1.1% Per Year

Even investors who hold international stock funds tend to undermine their own results. Morningstar’s Mind the Gap research found that investors in international stock funds underperformed the funds themselves by 1.1 percentage points annually over the ten years ending December 31, 2025. That’s the cost of bad timing: buying in after a strong run, selling after a bad year, and generally letting short-term performance dictate long-term allocation decisions.

Allan Roth, founder of Wealth Logic and a Morningstar contributor, put it simply in his 2026 analysis: investors are predictably good at timing markets and investments poorly. His recommendation is roughly two-thirds U.S. and one-third international for the stock portion of a diversified portfolio. But the more important point, he argues, is consistency. Pick an allocation, rebalance to it, and stay the course, even when one side of the portfolio feels like it’s underperforming.

That consistency is exactly what most investors fail to maintain. After a decade in which U.S. stocks crushed international markets, many people either eliminated their international allocation entirely or stopped rebalancing into it. Now that international stocks are outperforming, the temptation is to pile back in. Both moves represent the same mistake: letting recent performance determine long-term strategy.

Catalysts Beyond Valuations

The valuation gap alone makes a case for international stocks, but several catalysts could accelerate international outperformance over the next few years.

European fiscal expansion

Germany passed its largest fiscal spending package in more than three decades, with an estimated total value of $1.3 trillion directed toward military, infrastructure, and green energy projects. The European Central Bank cut rates by 2.35 percentage points between June 2024 and June 2025, and those cuts are still working through the economy. European bank stocks, even after a strong rebound, trade at 9 to 10 times earnings, a significant discount to U.S. financial companies.

The weakening dollar

The U.S. dollar fell approximately 9% in 2025, measured against a basket of developed-market currencies. When the dollar declines, foreign-currency investments become more valuable to U.S. investors because each unit of foreign currency converts to more dollars. Fidelity’s analysis suggests the dollar remains overvalued relative to both developed-market and emerging-market currencies, leaving room for further decline.

Japan’s corporate restructuring

Japanese companies have been quietly transforming their governance and capital allocation practices. Share buybacks are becoming more common, unprofitable business lines are being shed, and return on equity has been improving from single digits to low double digits across many large companies. Fidelity’s portfolio managers describe this as slow but impressive restructuring that could support years of improving profitability.

Questions to Ask Your Advisor About International Allocation

1. What percentage of my equity allocation is currently in international stocks, and how has that percentage changed over the past five years?
2. Does my portfolio include exposure to both developed international markets (Europe, Japan, Australia) and emerging markets, or is it limited to one category?
3. How does the current U.S. CAPE ratio above 40 factor into your return assumptions for my retirement income plan?
4. What is our rebalancing policy? If U.S. stocks continue to outperform, at what point do we rebalance back toward international?
5. Are the international funds in my portfolio hedged against currency fluctuations, or do they provide unhedged exposure that benefits from a weakening dollar?
6. How does international diversification interact with my withdrawal strategy? Are we drawing from the best-performing allocation first, or using a fixed schedule?
7. Given Vanguard’s 10-year projections favoring international stocks, should we revisit the return assumptions in my financial plan?

Red Flags That Your Portfolio Is Too Concentrated

• Your international equity allocation is below 15% and your advisor hasn’t discussed why or proposed an alternative approach to geographic diversification.
• Your portfolio’s international allocation has drifted downward over several years without any deliberate rebalancing, effectively making a passive bet on continued U.S. outperformance.
• Your advisor dismisses international diversification by pointing to the past decade of U.S. outperformance without addressing current valuations or forward return projections.
• You own “international” funds that are actually global funds with 50% or more in U.S. stocks, giving you less geographic diversification than you think.
• Your retirement income projections assume U.S. equity returns of 8% to 10% annually, which is well above what Vanguard and Shiller project for the next decade.

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The Bottom Line

The case for adding international stocks to a retirement portfolio isn’t about predicting which country’s market will win next year. It’s about recognizing that U.S. equity valuations are at levels seen only once before in modern history, that the structural dynamics of AI and global manufacturing favor production-oriented economies, and that every major investment research firm is projecting international outperformance over the next decade.

None of that guarantees international stocks will beat U.S. stocks. Valuations can stay elevated longer than anyone expects, and the U.S. economy has a track record of surprising to the upside. But a retirement portfolio that depends entirely on one outcome is not diversified. It’s a concentrated bet. And the math of the distribution phase, where poor early returns can permanently impair a portfolio, makes that bet especially risky for people who are already spending from their investments.

The most uncomfortable version of this advice is also the most accurate: if international stocks have felt like dead weight in your portfolio for the past decade, that’s probably a sign you need more of them, not less. The time to diversify is before you need the diversification.

This content is for informational purposes only and does not constitute financial, tax, or legal advice. Consult a qualified fiduciary advisor before making significant financial decisions.