In today’s interconnected global economy, a common debate among investors is how international equities should be represented in a well-constructed portfolio. With ever-changing economic conditions, geopolitical developments, and varying growth trends, investors should carefully consider how much global equity exposure should be reflected in their portfolios.
At Modera, we view international investing as an essential component of a diversified investment strategy. Rather than attempting to forecast which countries will outperform, we focus on constructing globally-diversified portfolios that reflect the structure of the overall global markets. Today, U.S. equities account for roughly 60% of the worldwide market, with the remaining 40% distributed across developed and emerging international markets. Our portfolios are designed with this ratio in mind, helping to ensure clients are positioned to participate in growth wherever it occurs.
This broad exposure can help hedge against systematic risk and supports more stable performance across market cycles — an approach designed to support long-term financial goals without overreliance on any single region.
Diversification —the strategy of spreading investments across a range of asset classes, sectors, and geographies to help reduce overall systematic risk—is one of the foundational principles of sound investing. International equities play an important role in this strategy. By including companies from developed and emerging markets outside the U.S., investors can potentially minimize the impact of country-specific economic cycles, political events, and currency fluctuations.
We take a disciplined approach to global diversification. Rather than trying to predict short-term winners, we aim to build portfolios that are broadly diversified across U.S., developed international, and emerging markets. This helps reduce dependency on any single region. When one area lags, another may offset the decline. Research has shown that international exposure can lower overall portfolio volatility. While the benefits of international diversification tend to level off beyond a certain percentage, a thoughtful allocation to international equities can increase portfolio resilience over time.
International markets also don’t always move in sync with the U.S. A slowdown in the S&P 500 doesn’t necessarily mean the same for Europe, Asia, or emerging markets. That’s part of the value in looking abroad — different economies respond to global events in different ways. Additionally, international investing opens the door to companies and industries not accessible through U.S. markets alone.
Ultimately, our goal at Modera isn’t to chase trends or time markets. It’s to help clients stay invested in a globally balanced way that supports long-term results. This approach won’t always feel exciting in the short term, but it’s a sound way to build lasting financial success.
When examining the current global markets, the S&P 500 has a forward P/E ratio of 22.1x, which is high relative to its historical average P/E of 15.8x. This valuation premium implies that investors are more optimistic than average about the U.S. market’s prospects for future growth. If growth underperforms these lofty expectations and valuations move toward averages, U.S. equities could underperform.
The global market outside of the U.S., as measured by the MSCI EAFE, is closer to its norms with a forward P/E ratio of 14.7x for developed markets and 12.7x for emerging markets per the MSCI EM, in line with historical averages of 15.4x and 11.9x, respectively, with investors more cautious on international growth opportunities. Allocating globally helps temper the enthusiasm of the U.S. market.
These figures tend to underscore the importance of maintaining a well-diversified, globally balanced portfolio. While U.S. markets are highly valued, international diversification can help mitigate potential losses. Market dynamics are constantly shifting; different international markets have each had their turns in the limelight. At Modera, our time-tested approach of staying level-headed and diversifying across asset classes and regions remains a prudent strategy—one that supports our clients in pursuing their financial goals while managing risk effectively.
In an increasingly interconnected and dynamic global economy, international equities may play a crucial role in building resilient and diversified investment portfolios. We believe that rather than trying to predict which countries or regions will outperform, a more effective strategy is to reflect the global market’s structure through broad, balanced exposure. This approach not only helps mitigate region-specific risks but also can potentially enhance the long-term stability and performance of the portfolio.
Diversification across geographies helps to reduce risk while opening access to a broader range of industries and growth opportunities. By aligning portfolios with the global market and avoiding common investor pitfalls, such as market timing, our clients can be better equipped to navigate economic cycles.
Ultimately, our philosophy is rooted in discipline, not speculation. A globally diversified portfolio isn’t about capturing the highest short-term gains, but it is a time-tested strategy for achieving consistent, long-term financial success.
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