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What's the Market Takeaway So Far in 2025?

The stock market's volatility so far in 2025 may prompt questions like--

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  • “Is my portfolio positioned to handle a significant market downturn?”

  • “How can I minimize the volatility of my portfolio during turbulent times?”



Since the market has not experienced a truly prolonged downturn since the Great Recession in 2008, negative volatility can be unnerving for investors, especially those who have not been investing long enough to experience a market downturn firsthand. Part of the answer to these questions lies in a classic investment allocation principle:  diversification.  


One big story for 2025 has been the benefit of diversification into international stocks.

 

A Tale of Two Markets in 2025: US vs. International


The US stock market faced a challenging start to the year, hitting a low point of -15.63% on April 8th (as represented by the Vanguard Total Stock Market ETF; VTI). This decline reflects the hurdles encountered by US equities, driven by a mix of economic uncertainties and policy shifts. Since then, the market has climbed back slowly to be positive for the year, up to +1.60% as of June 3rd.


In contrast, international developed stocks painted a much brighter picture. The Vanguard Developed Markets Index (VTMGX) had its low point on April 8th at -3.79% and climbed all the way up to +17.27% as of June 3rd.

This 15.67% divergence in year-to-date returns highlights the importance of global diversification in investor portfolios, as international exposure can help offset domestic downturns.


Historical Context for International Diversification


The US has the largest stock market in the world, containing about 65% of the value of all stocks.  Since the US market is the biggest, should that make it the best or only place to invest? Not necessarily!


The randomness of individual countries' stock returns makes it very difficult to determine which ones will outperform in the future. Consider the chart below, put together by Dimensional Fund Advisors, which ranks the returns of 22 developed stock markets by year over the past 20 years. Each color represents a different country, and each column is sorted top down, from the highest-performing country to the lowest.


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Here are some takeaways from this chart:


  • Performance by each country can vary widely year by year. For example, New Zealand was the top-performing country in 2019 and just two years later was the worst-performing country.

 

  • While the US posted the 2nd highest annualized return over these 20 years, they were only in the top half of the chart 65% of the time, and the top performing country in one year.


Even though the US has had strong market performance in the last 20 years, there are times when the US performance is weak compared to international stocks. For example, in the 20 years from 1970 to 1989, international stocks (represented by the MSCI World ex USA Index) outperformed US stocks (represented by the S&P 500) by 4.50% per year. What seems like a small difference in annual return, though, can make a huge difference when compounded over time. The chart below illustrates this point by showing the effect of this return difference on a $100,000 retirement portfolio over 20 years:


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Implications for Investor Portfolios


It is impossible to predict which countries will deliver the best returns in the future, and history shows that holding stocks from just one country may not be an ideal strategy. That is why holding stocks from markets around the world positions investors to potentially capture higher returns where they appear, and outperformance in one market can help offset lower returns elsewhere. Put another way, a globally diversified portfolio can help provide more reliable outcomes over time.


We implement the principle of international diversification for our clients.


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If you’d like a complimentary analysis of your investment portfolio, please reach out to Loyd Burleson III to set up a time to chat (loyd@freedom4dentists.com; call 425-888-1911; or use this link to schedule directly on his calendar).

 


 

 

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