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Your Retirement Portfolio Needs More International Exposure


For most Americans, investing for retirement is a long-term practice that occurs over the course of many decades. It requires looking beyond the daily ups and downs of the stock market, remaining disciplined in the face of economic volatility and adopting a long-term focus — and possibly one that looks beyond U.S. borders.

While U.S. equities have historically outperformed international large-cap stocks, analysts at Charles Schwab Investment Advisory predict that trend will be reversed over the next decade. Despite lagging behind American small- and large-cap stocks over the last 50 years, international large-cap stocks will outpace both asset classes in the coming years, according to the financial firm’s 2022 Long-Term Capital Markets Expectations. That could have significant implications for your retirement plan.

Need help selecting investments for your retirement portfolio? A financial advisor can help build a portfolio that aligns with your long-term goals and then manage it for you. Find a trusted fiduciary advisor today.

Why Schwab Favors International Stocks

A woman looks over her retirement portfolio. Schwab projects international large-cap stocks will outperform U.S. counterparts over the next decade.

If international large-cap stocks outperform their U.S. counterparts over the next 10 years, as Schwab projects, it would mark a departure from an established trend. Between 1970 and 2021, domestic large-cap stocks, as represented by the S&P 500, gained 11.1% compared to the 8.7% that international large-cap stocks, as represented by the MSCI EAFE Index, returned during the same time period.

Despite this track record of underperformance compared to similar U.S. stocks, international large-caps have a better chance of outperforming over the next decade, according to Schwab.

“We take a forward-looking approach to forecasting returns, rather than basing our estimates on historical averages,” Veeru Perianan, director of multi-asset research, wrote in the company’s most recent long-term outlook. “Historical averages are less useful, as these only describe past performance. Forward-looking return estimates, however, incorporate expectations for the future, and for this reason we believe they are more useful for making investment decisions or projecting future performance than using historical results.”

As a result, Schwab projects international large-cap stocks will produce total returns of 7.5% by the end of 2031, while U.S. large-cap stocks are projected to produce total returns of just 6.4%. Domestic small-cap equities, as represented by the Russell 2000 Index, will fare slightly better (6.8%) but will still lag behind international large-caps, Schwab projects.

The reason? Domestic equities are likely overvalued compared to international stocks, according to Perianan.

The S&P 500, which tracks the performance of 500 large U.S. companies, rose 27% in 2021. However, the future growth of domestic large-cap companies was priced in “to a far greater extent” than international counterparts, Perianan wrote.

“The difference is mainly due to the valuation differences between U.S. stocks compared to international stocks,” he wrote. “International stocks are generally riskier than U.S. stocks and investors expect to be compensated for taking on this additional risk. However, we believe that the markets have discounted this risk beyond what fundamentals suggest.”

What About the War in Ukraine?

Gas prices have surged since Russia invade Ukraine on Feb. 24, 2022.

But Schwab’s analysis leaves out a major variable: the war in Ukraine.

While the projections were created prior to Russia’s invasion of Ukraine, a spokeswoman for the company stressed the March 1 analysis is anchored in long-term fundamentals and is not intended to serve as a short-term tactical forecast.

The war in Ukraine has rattled markets and sent stock prices tumbling, while oil and gas prices have soared. The national average for a gallon of gas reached $4.06 on Monday, a level not seen since July 2008, according to AAA. In fact, the average price of a gallon of gas is now $0.45 more than just a week ago.

Meanwhile, stocks continued to fall on Monday, continuing the recent volatility that has rattled investors around the world. However, experts recommend long-term investors don’t panic and remain invested in markets. Recent history shows us that investors, especially those with long time horizons, are wise to ride out times of political and financial crisis. For example, the S&P 500 has risen nearly 650.9% since the U.S. invasion of Iraq in 2003 and 551.8% since the depths of the Global Financial Crisis in 2009.

UBS recently offered five steps for investors to protect themselves from further market uncertainty, including keeping a diversified portfolio, using commodities as a hedge and building up defensive positions with global healthcare stocks and dividend-producing assets.

Bottom Line

Despite a significant history of underperforming compared to U.S. stocks, international large-cap equities are projected to surpass their American counterparts over the next 10 years, according to recent analysis from Schwab. While the projections don’t take into account the current war in Ukraine, they are based on long-term fundamentals and not meant to guide a short-term tactical investment strategy.

Tips for Retirement Savers

  • A financial advisor can be a valuable partner when it comes to saving and planning for retirement, and creating a comprehensive financial plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • While employer-sponsored retirement plans are powerful tools for building a nest egg, don’t overlook the viability of a health savings account (HSA). Contributions are tax deductible, grow tax free and aren’t taxed when used for qualified medical expenses. Additionally, the money remains in your account forever and can be carried into retirement.
  • Knowing where you stand it comes to your savings goals is an important part of retirement planning. SmartAsset’s retirement calculator can help you estimate how much money you’ll have saved by the time you’re ready to retire.

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