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Revisiting the Potential Diversification Benefits of Investing Internationally


During the course of 2022, there were several major geopolitical conflicts that brought distress to international markets. While many of these issues are ongoing, we believe that there has been stablization in sentiment surrounding non-U.S. investments. Meanwhile, it can be argued that domestic markets are currently overvalued and seeing increased levels of volatility. With that in mind, it is our view that U.S. investors remain broadly underweight international equities and that shifting allocations from domestic to international investments can potentially provide strong diversification benefits.

  • The U.S. equity market has become increasingly concentrated, particularly over the last five years. The Top 5 companies in the S&P 500 Index now represent 22% of the index. This brings heightened risk to U.S. equity investors as an increasingly narrow cohort of stocks are driving the index.
  • Conversely, the MSCI EAFE Index is less concentrated than it was 20 years ago. The Top 5 companies in the MSCI EAFE Index represent just 8.9% of the index.

Based on the above charts, it is our view that those overly invested in U.S. equities may have too many eggs in one basket. A smaller pool of investments could have a lot more weight on a portfolio’s performance than may be anticipated. During times of volatility, it can be potentially advantageous to have assets that display lower levels of correlation with one another. As seen on the chart to the right, the rolling 3-year correlations between U.S. and non-U.S. stocks have started to decrease. Should this trend continue, diversification benefits to U.S. investors allocating to international equities may strengthen.

Aside from the factors discussed, there’s another important aspect of diversification that international equities can potentially provide – income. International equities have consistently delivered higher dividend yields to investors than U.S. companies. Given economic uncertainty around persistent inflation and higher rates, some expect lower returns in the coming years. In that environment, dividends could become increasingly important as the share of total returns from dividends would increase.

Beyond the idea that now may be an attractive entry point for non-U.S. equities from a valuation perspective, it is our view that investing internationally can be a fundamental component of building all-weather, diversified, and attractive portfolios. We believe that the diversification benefits offered by this asset class should not be overlooked, especially as U.S. equities struggle to gain firm footing in the current market environment. For additional insights and outlooks on the economy and more, please visit our Harbor Insights Page.

Important Information

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice.

Past performance is no guarantee of future results.

All investments involve risk including the possible loss of principal. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. At times, a growth investing style may be out of favor with investors which could cause growth securities to underperform value or other equity securities. Foreign securities may be subject to greater risks than investing only in the U.S. These risks are more severe for securities of issuers in emerging market region and may be more volatile and less liquid due to currency fluctuation, political instability, government sanctions, social and economic risks. Foreign currencies can decline in value and can adversely affect the dollar value of an investment. Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. The MSCI EAFE Index is an unmanaged index generally representative of major overseas stock markets. These unmanaged indices do not reflect fees and expenses and are not available for direct investment.

In relation to any data attributed to Morningstar, please note the following: © Morningstar 2023. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

This material may reference countries which may be generally the subject of selective sanctions programs administered. Readers of this commentary are solely responsible for ensuring that their investment activities in relation to any sanctioned country are carried out in compliance with applicable laws, rules or policies.

References to specific company securities are for illustration only and should not be construed as an offer or solicitation from Harbor Capital to buy or sell any securities.

Dividend Yield is the percentage a company pays out in dividends each year relative to its stock price.

Diversification does not assure a profit or protect against loss in a declining market.


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