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I have a confession to make: Over the past year, I’ve been moving money out of U.S. Treasuries and into international stocks. For someone who’s long preferred safety over risk, this marks a major shift.
The catalyst, somewhat surprisingly, was a 2024 memo: Howard Marks’ “Sea Change.” Marks—a legend in the investment world—made the case that we’re living through only the third true inflection point in markets since the 1970s. He highlighted structural shifts: the end of a four-decade era of declining interest rates, rising inflation, and a reversal (or at least stalling) of globalization. The playbook investors used from 2009 to 2021 may no longer apply.
I once relied on Treasuries as my security blanket. More importantly, the relationships I once counted on—stocks and bonds moving oppositely, Treasuries as a “risk-off” haven—seem less reliable now. Instead of cushioning equity losses, bonds have occasionally fallen in tandem with stocks, particularly in inflationary shocks. That safety net? It’s not what it used to be.
So, why international stocks? For one, they’re cheaper. And now I’m seeing more evidence to support the shift. A recent Morningstar article breaks down research showing that valuation expansion—the increase in the price investors is willing to pay per dollar of earnings—has driven most of the U.S. market’s gains since 2008. Fundamentals took a backseat. From 2008 to the end of 2024, the CAPE ratio for U.S. equities more than doubled. In contrast, the MSCI EAFE index (which tracks developed markets outside the U.S. and Canada) saw its CAPE rise just 36%. Historically, when valuations double, markets often underperform in the following decade. It’s a sobering correlation.
Are you sticking with the old playbook? Or have you made similar moves? I’d love to hear how the HumbleDollar community sees the future of investing—especially when we tune out the political noise.
Haven’t Int’l stocks outperformed in several decades since 1970? So not sure this is something different.
Also, the 80’s and 90s were such that it’s not unreasonable to think the bull market of the 2020s could keep going at about 11% per annum for another 5 years.
This is the problem with a lot of the math predicting things, there’s usually other math that points in a different direction, that’s equally plausible.
I hold Int’l equities, I’ll continue owning them, just a lot less sure we know where this market is headed. There are a lot of undervalued S&P companies, I could see the rotation be US Value companies quite easily, especially since those CAPEs are driven by maybe 10-20 companies (on a market cap basis).
In Triumph of the Optimists, Dimson, Marsh, and Stanton looked at performance of U.S. and international equities over the century from 1900-2000, and continued to report on that through their annual Credit Suisse yearbooks, now published by UBS.
Yes, international stocks have outperformed U.S. stocks during a few periods over the last 125 years. Today’s market cap ratio for US:ex-US is ~60% to 40%, but there have been many periods since 1900 when the ratio was very different. The 2023 summary issue of the CS/UBS Yearbook updated that graphic.
For the most recent 20 years here were the returns:
Large Cap U.S. Equity 237.59%
Small Cap U.S. Equity 232.67%
Developed Ex-U.S. Equity 171.35%
For the most recent 10 years here were the returns:
Large Cap U.S. Equity 142.68%
Small Cap U.S. Equity 135.21%
Developed Ex-U.S. Equity 74.12%
The above per Callan. As can be seen U.S.Small caps did better than Developed Ex-US Equity. Interesting to me was the fact that many experts gave small caps a pass when discussing. My small- mid-caps allocation is 38.56%. In my personal experience I did well with foreign stocks only because I was very selective. For example, one has gained 514% even after the recent tariff jitters.
As usual, no one knows what the future will bring.
Being blessed with two S.S. accounts and two pensions I’ve never considered bonds. Now that I am recently retired, I still don’t.
But this year after retiring I have gotten less aggressive. I’ve rebalanced our portfolio into 50% VT (Vanguard World Index) , 40% VTI (Vanguard U.S. Index) , and 10% VUG (Vanguard Growth Index). Until the rebalancing funds I was 50% VTI and 50% VUG.
I consider our Social Security accounts and our pensions to be our “bond” type of income.
Right now my target asset allocation is 30% US/15% international equities, 45% bonds, 10% cash. Was 50/50 equities/ bond/cash, but about a year ago Morningstar’s calculated the you could be as low as about 30% equities and due to improved predicted bond yields you could obtain most of the markets predicted returns. Keeping to my typical no more than 5% changes in my portfolio at a time I increased our bond exposure by that percentage.
I’ve been overweight ex-US stocks for a while now. Like you said, better fundamentals. But there’s no predicting the future so we’re keeping our U.S. allocation. Ours has quality, value and small value tilts which are consistent with our long-term plan.
I did shorten the duration of our Treasury holdings recently. And added a little VNQ with plans for more.
We are sticking with our old playbook. Basically we invest in a globally diversified portfolio of stock ETFs based on the global market. For a long time our stock allocation was about 55 US/45 international (and the international was much higher than most folks of course). Earlier this year, we raised the US to close to 60 and lowered international accordingly. This seems to go against the trend this year as for various reasons including some of this in the post as well as performance chasing, people seem to be shifting a bit more into international. Our international is still higher than most even with people putting a more. And there is no change to bond allocations which also include a bit of international and are about half ETFs and half a rolling 10 TIPs ladder. Our goal in retirement is preservation and risk management while maintaining a solid level of cash flow for spending.
Interesting. I’ve been thinking about this subject recently as well, and also wondering if It Really Is Different This Time. Marks makes some good points; on top of this, I see the US threatening…well, just about everybody with heavy import taxes as a condition of doing business, as well as threatening to hit foreign investment in the US with “revenge” taxes. Is this a temporary blip, or will this become part of our long-standing policy? At this point, only time will tell; markets don’t seem to be too concerned at this point, and I don’t really feel comfortable second-guessing them.
Still though, adding a little more international exposure as part of a long-term shift to an investment portfolio does seem like a good move. I like your idea of adding this via selling off a bit of bond exposure. Those who have some international exposure this year have been rewarded handsomely so far(at last!), and for various reasons this seems like a trend that could continue for some time.
Thanks for your reply. I realize that questioning the market’s direction can feel like swimming against the tide. But Warren Buffet’s saying comes to mind: ” Only when the tide goes out do you discover who’s been swimming naked.” With the recent wave of volatility battering the bond harbor, I’m finding that sometimes the safest choice is to swim toward greater diversification.
I’m curious: do you perceive this reallocation of bonds to international stocks as increasing or decreasing your portfolio’s risk level? Would the higher stock allocation not increase potential volatility? Just interested in your thoughts, no criticism here.
I don’t assess risk in isolation—especially due to my varying time horizons. Instead, I lean into diversification as the only free lunch investing reliably offers. That’s why I chose not to detail my asset allocation; my intent was to spotlight the thinking behind the shift. With each Treasury bill maturity, I asked myself, “What’s the best use for this cash now?” Slowly—and not without hesitation—I began reallocating into international stocks, seeking more diversification. Howard Marks’s “Sea Change” memo was the real accelerant, reframing how I view structural shifts in the market. If bonds start behaving like stocks, they’ve lost their role as a stabilizing anchor. That erosion nudged me further outside my comfort zone.
Thanks for your reply.
That is a fair point. Normally, swapping bonds for stocks could reasonably be expected to increase volatility. I think in this case, however, the question is that, with US debt reaching exorbitant levels, with no political will or interest to reign it in, the risk involved in holding treasuries is not being rewarded enough by today’s current yield levels. Just look at what happened to long-term US treasuries in 2021–it may take those funds *decades* to recover their losses, if ever. For a supposedly safe,”low-risk” asset, that is terrible performance, and way more risky than many people were led to believe, in my opinion.
Under those circumstances, holding International stocks seems a safer bet to many folks, myself included. I sure don’t want to be holding anything very long in bonds, with 10 years being absolute tops. The exception being, if you can get individual TIPS at something like 2.5%+; otherwise, keep it short.
I’ve never been a fan of bond funds. My preference is holding different dated bonds until maturity.
Are you advocating replacing Treasuries with small caps?
The capitalization of the S&P 500 is about 34% tech firms. Zweig at the WSJ recently pointed out that “The tech-dominated titans in the MSCI USA Mega Cap Select Index are trading at an average of 30.4 times net profits and nearly eight times net worth. The Russell 2000 trades at 18.3 times earnings and two times net worth.” In other words, smaller caps might be more attractive at this time.
Higher valuation stocks tend to get punished more in downturns.
That said, the equity portion of my portfolio is about 15% small caps, 22% mid-caps and 60% large caps. It is about 27% growth and 26% international stocks. I have a very robust bond/cash portion, but few bond funds. I haven’t made any real changes for about 3 years and don’t anticipate reducing my non-equity component which is bonds and cash; we aren’t spending all of our annual income so there might be a benefit to increasing equities to improve long-term performance. I did add to my stock positions in 2024 and 2025.
At this time I consider my overall portfolio to be well positioned. There is always room for improvement,
I wasn’t advocating any particular Morningstar style or a market-weighted tilt like small caps. My emphasis was on the portfolio shift itself—one driven not by allocation models, but by a rethinking of how I frame the market. As John Maynard Keynes is often quoted: “When the facts change, I change my mind. What do you do, sir?” That sentiment captures the evolution I’ve experienced. The landscape feels fundamentally different, and clinging to familiar structures doesn’t seem prudent. My pivot reflects a response to that changing reality—not an endorsement of any one asset class.
My allocation is 50% stock mutual funds and 50% bonds and fixed income. I see no reason to change whether or not “it’s different this time”. Which I will believe after it happens.
I’m simply too lazy to make any portfolio changes.
i just add more funds with each laddered CD after it matures and buy another.
I remember reading that memo. As I recall, part of the “sea change” was in favor of bonds, and especially high yield if memory serves (which it may not do perfectly).
Not a result of Howard’s memo, but I am thinking about increasing our bond allocation. I feel like we don’t necessarily need lots of growth from the stock side of our portfolio so can do what we need to with less risk.
You’re absolutely right in your recollection. Howard Marks, co-founder and co-chairman of Oaktree Capital—a major player in alternative assets—used his “Sea Change” thesis to frame a shift in the investment landscape. While I find his argument about a new era in investing quite compelling, I was not persuaded by the sales pitch for high-yield bonds and private credit that followed.