Are International Markets Worth Investing In for U.S. Investors?

It might go without saying that investing in the stock market can lead to long-term wealth creation. An important strategy to ensure lasting success, which might sometimes be overlooked, is to build a diversified portfolio.

Of course, this involves picking businesses that operate in different industries, sell different products, and cater to different end customers. However, diversification from a geographical perspective is also something to consider.

Is it time for U.S. investors to seriously consider allocating capital to international markets? Here's the bear and bull case for this strategy.

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It has been a bad idea to bet against the U.S.

Warren Buffett, who compounded Berkshire Hathaway's share price at an exceptional annualized rate of nearly 20% for six decades, understands where the most promising opportunities lie.

"Never bet against America," the Oracle of Omaha wrote in the 2021 shareholder letter.

The U.S. has the biggest economy in the world, a culture of entrepreneurship and ingenuity, strong property rights, and robust capital markets to facilitate ongoing growth. These factors feed on themselves to create a positive feedback loop, supporting sustainable progress in the future.

For investors, owning the S&P 500 index has been a fantastic move, as the benchmark has generated a total return of 305% in the past decade (as of April 23). These gains have been driven by the "Magnificent Seven" stocks, which have become some of the most dominant companies we've ever seen. From a societal perspective, they're also historically significant, given that their products and services impact technological trends on a global level.

It's also difficult not to come away impressed by the powerful position America has in other areas, like financial services, defense, energy, entertainment, and pharmaceuticals.

Geographic diversification makes sense in the current environment

One of the main reasons to consider international exposure is the U.S. stock market's valuation, as the S&P 500 index has only been more expensive during the dot-com period. This doesn't mean that poor returns are a foregone conclusion. But it might suggest that performance in the future won't resemble what was achieved in the past.

And with rising geopolitical tension, aggressive U.S. trade tactics, massive federal debt, and countries wanting to keep artificial intelligence progress within their own borders, maybe America won't be the main attraction for capital as it has been historically.

This makes me believe that it's smart for U.S. investors to allocate 5% of their portfolios, still a relatively small share, to the Vanguard Total International Stock ETF (NASDAQ: VXUS). At a low expense ratio of 0.05%, this investment vehicle provides exposure to leading foreign companies, like Taiwan Semiconductor Manufacturing, Samsung Electronics and ASML Holding, which are the three top holdings.

This ETF offers a way for investors to diversify from a geographical perspective.

Neil Patel has positions in Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends ASML, Berkshire Hathaway, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.