In conversations about international investing, I often hear responses ranging from “I don’t understand it” to “I hate it.” The debate over the benefits of international diversification is ongoing, with high-profile critics like Warren Buffett and Jack Bogle frequently cited. And who wouldn’t want to listen to them?

Recently, I came across an insightful article by renowned academic Meir Statman, titled “International Stocks and Recency Bias.”¹ Below, I’ll summarize some key takeaways, but I encourage you to read the full article for a deeper perspective.

Key Points

• Many American investors doubt the value of international diversification due to the recent underperformance of international stocks.
• Human psychology often leads to cognitive biases, one of the most common being recency bias—placing too much weight on recent events and trends.
• We tend to regret unfamiliar losses more than familiar ones, making it psychologically harder to stick with international investments.

Is International Diversification Still Beneficial?

Take a look at the charts in Statman’s article. The first chart shows five-year rolling returns for U.S. and international stocks since 1974. The cyclicality of performance is striking—there are periods where U.S. stocks outperform, followed by periods where international stocks take the lead. There’s no reliable way to predict which will outperform next. This unpredictability underscores why diversification is so important.

Source: MSCI. Returns in USD. U.S. stocks are represented by the MSCI USA Index. International stocks are represented by the MSCI World ex USA Index. World stocks are represented by the MSCI World Index. There are 600 monthly five-year rolling periods from December 31, 1974 – December 31, 2024. Past performance is no guarantee of future results.

The second chart provides another crucial insight: Over the 40-year period from 1970 to 2011, U.S. and international stock performance was virtually identical. A simple 50/50 allocation between the two, with annual rebalancing, would have resulted in a smoother investment experience and an estimated return of 9.80%.

Source: MSCI. Returns are annualized in U.S. dollars. The USA is represented by the MSCI USA Index. World ex USA is represented by the MSCI World ex USA Index. Past performance is no guarantee of future results.

Cognitive Errors and Recency Bias

If you’re interested in the psychology behind investing, I highly recommend Thinking, Fast and Slow by Daniel Kahneman. He explores the research behind cognitive biases, which affect all of us—including me!

One of the most prevalent biases in investing is recency bias, where we overweight recent trends and ignore long-term historical patterns. Statman highlights that over the past decade, U.S. markets have outperformed international markets by an average of 7.8% per year. Assuming this trend will continue indefinitely is a classic example of recency bias at work.

Regret and Anchoring to the Familiar

Another common bias is our tendency to anchor to what’s familiar. Many investors compare their portfolio performance to the S&P 500, often feeling content when it’s doing well and excusing poor performance by saying, “the market is down.” However, all investments go through cycles of underperformance. A disciplined investor recognizes that these fluctuations are normal and remains committed to their strategy through both good times and bad.

We should ask ourselves: Is it rational to dismiss U.S. underperformance while feeling undue regret when international stocks lag? Successful investing requires consistency, not reactionary decision-making.

Lessons for Investors

International diversification remains a key component of a well-constructed investment strategy. The most successful investors determine a level of diversification they are comfortable with—one they can stick with through market ups and downs.

Additionally, regular rebalancing can enhance long-term returns. The first step to overcoming cognitive biases is recognizing them. The second is creating a rules-based, systematic investment strategy grounded in sound principles and aligned with your overall financial goals.

By understanding these biases and committing to a disciplined strategy, investors can make more rational, informed decisions—ultimately improving their chances of long-term success.

1. Avantis Investors. International Stocks and Recency Bias. Retrieved from https://www.avantisinvestors.com/avantis-insights/international-stocks-and-recency-bias ↩︎