Most people I know accept the benefits of stock market diversification. But they fail to apply this logic geographically and over-invest in US stocks. This is called “home bias” and it’s a mistake.

As the saying goes, diversification is the only free lunch in investing. Why is that? Because buying a diversified basket of similar investments allows you to get the same expected return as a non-diversified basket but with much lower risk. And I think most people understand this.

But then I ask the same people where they invest their retirement savings and they’ll say the S&P 500 or some other US-only fund. This makes no sense to me.

It’s hard to know exactly what percentage of the global market cap US public stocks comprise but from what I can tell it’s about 60-65%. Why would you miss out on investing in up to 40% of the global stock market? Additional diversification will lower your risk!

“But Ben,” I can hear you thinking, “haven’t international stocks underperformed US stocks for the last 15+ years? Why would I invest in stocks that have consistently lower returns?” It’s a reasonable question. The answer, of course, is that past performance does not predict future results.

For example, the NASDAQ–a decent proxy for tech stocks–has absolutely crushed the S&P 500 for the last 30 years. Would you count on that continuing for the next 50 years? Potentially, but people usually don’t make this bet and know a more diversified (US) stock index is safer.

In just the same way, a global basket is safer than a US-only basket. Not to mention, there have long stretches in which international stocks have previously outperformed US stocks by a lot, like the late 80s and the early 2000s.

The other important reason to invest internationally is it’s an important hedge against your other source of returns: your job.

If you work in the US, your expected earnings are highly correlated to the US economy. If your company does well, it’s more likely that the US–and US stocks–are doing well. In investing you generally want to hedge these types of exposures, not double down on them.

For that reason, there’s actually a good case that you should be more exposed to international stocks than the global market cap weight–meaning more than 40%. I personally don’t do this but think the logic is pretty persuasive.

How can you get exposure to US and international stocks cheaply and easily? As I mentioned in a previous post, I really like the Vanguard ETF “VT”, or the Vanguard Total World Stock Index Fund ETF. It’s just almost every stock in the world, weighted by market cap.

Don’t sleep on the rest of the world just because you’re in the US (if you are). Eat that free lunch and diversify.

As always, this post is not investing advice!