International stocks: the US isn't the only country with a stock market. Allegedly.

By Tom, CPA · Updated October 25, 2026

TL;DR: International stocks give you exposure to companies outside the US. The case for them is diversification: no single country is guaranteed to lead, and research on withdrawal rates across countries shows that US history was unusually kind. The case against: currency swings, slightly higher costs, and years of US outperformance. Common choices range from 20% of stocks to full global market-cap weight. The foreign tax credit favors holding them in taxable accounts.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Every decade has a favorite market. For long stretches recently, it's been the US, and that streak has convinced a lot of investors that international stocks are a charity donation. Lavish Larry asks why anyone would own "the losers." Frugal Fran asks how confident anyone can be about which country wins the next 50 years, which is exactly as long as her retirement might last.

This guide covers how to think about the international slice of an index fund portfolio, including the three-fund portfolio.

CPA Warning Label: Past performance of any country doesn't predict the future. Foreign tax credit rules have limits and filing requirements, and the credit generally isn't available for taxes paid inside IRAs.

The case for and against

For international stocks:

• Diversification against single-country risk. Investors in other countries have watched home markets stagnate for decades. Concentrating a 50-year retirement in one country is a bet, even if it's a country you like.
• US history may be the lucky draw. Wade Pfau's 2010 study of 17 developed countries over 109 years (Journal of Financial Planning) found that a 4% withdrawal rate would have worked in only 4 of the 17 countries for 30-year retirements under his assumptions. The US results that most FIRE rules rest on came from one of history's best-performing markets.
• Leadership rotates. Periods of US outperformance have historically alternated with periods when non-US stocks led. Nobody reliably predicts the switch.

Against (or for less):

• Currency risk adds volatility for someone who spends dollars.
• Somewhat higher costs. International index funds usually have slightly higher expense ratios than US total-market funds. Check current prospectuses.
• US multinationals already earn a lot abroad, so a US index includes some global economic exposure.
• Emerging markets add political and governance risks, such as capital controls and weaker shareholder protections, that developed markets have less of.
• Foreign withholding taxes reduce dividends, although the credit often offsets this in taxable accounts.

Market-cap weights

The neutral starting point is market-cap weighting: own each country in proportion to the value of its stock market. A global total-market index fund does this automatically. The US share of world market cap changes over time with relative performance, and it has been well over half in recent years. Check a current global index fact sheet for today's figure rather than trusting any number frozen in a blog post.

Market-cap weight is the "no opinion" allocation. Holding less international than market weight is a home-country bet. That can be reasonable, since you spend dollars and your liabilities are in dollars, but it's still a bet. Valuations matter too: when one market has run up far more than others, its future expected returns may be lower, though valuation-based timing has a famously unreliable record. Many investors and target-date fund designers settle somewhere between 20% and 40% of stocks internationally as a compromise between those two views.

Currency risk

When you own a European stock fund, you own euros, pounds, francs and kronor indirectly. If the dollar strengthens, your foreign shares are worth fewer dollars even if their local prices didn't move. If the dollar weakens, you get a tailwind.

• Over short periods, currency moves can add meaningfully to volatility.
• Over long periods, currency effects have tended to be less dominant than company earnings, but they can still matter for a decade at a time.
• Currency exposure can also diversify. A weak dollar often goes with higher import prices, so foreign assets can partly hedge US inflation.
• Currency-hedged stock funds exist, but they add cost and complexity. Most index investors leave stock currency exposure unhedged.

For bonds it's different: currency swings can overwhelm bond returns, which is why international bond funds are usually hedged and many US investors skip them entirely.

The practical takeaway: don't judge international stocks by a single year's currency move. If you can't tolerate the extra wobble, hold a smaller slice rather than trying to time the dollar, which professional currency traders find hard enough.

Tax angle

Foreign governments often withhold tax on dividends paid to foreign investors, including US-based funds. US investors can usually get some of that back through the foreign tax credit:

• In a taxable account, the fund passes the foreign tax through on your Form 1099-DIV. You can claim a credit (or deduction). IRS Publication 514 lets you skip Form 1116 if your qualified foreign taxes are not more than $300 ($600 married filing jointly) and are all reported on a payee statement like a 1099-DIV, among other conditions.
• In an IRA or 401(k), the foreign tax is still withheld, but there's no credit to claim, so it's simply a cost.
• In a Roth IRA, same thing: the foreign tax is lost.

That's why asset location often puts international stock funds in taxable accounts and bonds in tax-deferred ones, where possible. One wrinkle for FIRE retirees: a credit only helps if you owe US tax. In years when you're in the 0% capital gains bracket with little ordinary tax, the credit may not save anything. See the taxable brokerage guide.

Picking a number

A practical decision process:

1. Decide your philosophy. Neutral (market weight) or home-tilted.
2. Pick a round number you could live with for 20 years without fiddling. Common answers: 20%, 30%, 40% of stocks, or market weight.
3. Write down why. When international lags for five years, and it will at some point, reread your reason before selling.
4. Implement cheaply with a broad international index fund covering developed and emerging markets, or a single global fund.
5. Rebalance on your normal schedule using rebalancing strategies.

Illustration: Fran holds $1.2M of stocks and chooses 30% international: $840,000 in a US total-market fund and $360,000 in an international total-market fund, held in her taxable account to capture the foreign tax credit. Suppose the fund passes through $540 of foreign tax on her 1099-DIV. As a joint filer under the $600 threshold, she can generally claim the credit without Form 1116 if she meets the other conditions in Publication 514. Larry stays 0% international and is very happy, right up until the US has a lost decade, as it effectively did from 2000 to 2009, when the S&P 500's cumulative total return was about -9% across the whole decade in the Damodaran dataset, dividends included.

Note what Fran didn't do: she didn't pick 30% because international was "due." She picked it because she wanted some diversification without giving up a mostly-dollar portfolio. That reason survives any five-year performance chart. Neither choice is crazy. Being so sure of one country that you won't own the rest of the world is the riskier stance. Next, round out the bond side with bond funds vs individual bonds and TIPS ladders. If you also hold property, see rentals for FIRE.