If you’re a federal retiree with money in the Thrift Savings Plan or other investments, you’ve probably noticed that your C Fund (which tracks the S&P 500) has done well over the past decade. But as markets shift, it may be time to take a fresh look at international investments (I-Fund), which hold stocks from other developed countries like Europe and Japan.
With a few key trends working in their favor, international stocks could become an important part of a well-balanced retirement portfolio moving forward.
International stocks are more affordable right now
Imagine you’re shopping for a home, and that a three-bedroom house in your city has historically cost around $500,000. In one neighborhood (U.S. stocks), three-bedroom houses are currently selling for $835,000. In another neighborhood (international stocks), you can get similar quality houses for around the $500,000 historical price.
Sure, there may be perks to being in the more expensive neighborhood, but at some point, you have to ask yourself if it’s really worth the additional cost for a house with the exact same specs.
That’s essentially what’s happening in the stock market today. As of March 2025, U.S. stocks are trading at prices that are about 67% higher than their long-term average when you look at their price-to-earnings ratios1. This is like paying $835,000 for the house that “should” cost $500,000.
Meanwhile, international stocks, particularly in Europe and Asia, are trading closer to their historical norms.
If pricing in the U.S. market begins to normalize, and valuations decrease (history says they often do) international markets could add stability to investor’s portfolios.
When stocks are expensive, future returns tend to be lower. When they’re lower-priced, you have better potential for gains. Research shows there’s a clear relationship between high starting prices and disappointing returns over the next 10 years.
Think of it like shopping: would you rather buy something that’s already priced high, or something similar that’s undervalued?
A weaker dollar can boost international returns
Here’s something that might surprise you: when you invest in international stocks through your I Fund, you’re not just investing in foreign companies, you’re also affected by currency exchange rates.
Imaging taking a vacation to Europe when the dollar was strong, everything seemed cheap. But when the dollar is weak, that same European vacation costs more. The same principle works with investments, but in reverse.
Since the beginning of 2025, the U.S. dollar has fallen about 7.5% against other major currencies2. But, why? Several factors are at play:
- The U.S. has large budget deficits and debt, making some investors nervous
- Trade tensions and tariff policies are creating uncertainty
- Other countries’ economies are starting to look more attractive relative to the U.S.
When the U.S. dollar falls in value, however, it can help your international investments. That’s because the value of overseas stocks, when converted back into U.S. dollars, often goes up.
Too much in one place can be risky
Another reason to think globally? The U.S. stock market has become incredibly concentrated. A handful of big tech companies—like Apple, Microsoft and Amazon—make up an ever-growing portion of the S&P 500 (C-Fund). That means your money is tied closely to the success of just a few companies. If those companies hit a rough patch, the whole fund could suffer.
While U.S. technology companies command premium valuations that reflect their historical outperformance, international technology and growth companies often trade at more reasonable multiples despite similar business models and growth prospects. This disparity suggests that international markets may offer better risk-adjusted returns as valuations normalize over time.
We’re all familiar with the phrase “don’t put all your eggs in one basket”. Well, that’s increasingly difficult to control in the S&P 500. The most effective way to diversify right now is to use a blend of investment vehicles, each with a different investment objective.
Leadership in the market rotates over time
For more than 10 years, U.S. stocks have been the star performers, returning about 12% per year compared to just 4.4% for international stocks3. But history would tell us that leadership tends to change hands over time.
The chart below shows the performance of U.S. versus international since 1975.
Historically, leadership shifts every eight to 10 years. Right now, many signs point to the start of a new cycle, one where international stocks may finally take center stage. They have attractive values and investors are beginning to look beyond U.S. tech stocks for growth.
While history is no indicator of future results, it can be a guide, which may foreshadow a new leader as international markets pick up steam.
Benefits and drawbacks of international index investing
So, you’re considering increasing your international exposure. Within the TSP, the only way to do this is to use the I-Fund, but outside the TSP there are a multitude of international investments structured in a variety of different ways.
At a high level, you can broadly categorize investment funds into “index” funds and “actively managed” funds.
As one would assume, index funds follow a defined investment index. They hold the exact allocation that the index defines, which typically includes hundreds or thousands of different companies to get broad exposure. This is how the I-Fund in the TSP is structured.
Actively managed funds have a management team that hand-picks companies that they think will perform well. Actively managed funds will have higher internal expenses, but the goal of these funds is to outperform the index.
There’s debate within the investment world about the merits of indexing vs. active management, but the fact is that, because of the complexity of international markets, good actively managed funds have been able to consistently outperform international indexes over the long run.
While the I-fund may be the only option for investors with most of their savings in the TSP, those with funds outside the TSP may want to consider using an actively managed strategy for their international exposure.
Think through your strategy with professional guidance
Yes, international investments are looking more appealing than they have in a long time, but that doesn’t mean it’s time to jump ship from U.S. companies. Selecting the right mix for your specific situation is a big decision, especially as you approach retirement.
If you’re wondering how much international exposure you should have or whether and index or actively managed fund is the right fit for you, a conversation with a fed-specific financial advisor could be a good next step.
Neil Cain and Austin Costello are certified financial planners with Capital Financial Planners. If you have questions about how retirement impacts your Medicare payments, register for a complimentary checkup. For topics covered in even greater depth, see our YouTube page.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries
- Current Market Valuation. Price/Earnings Ratio, March 2025
- Morningstar. More than Tariffs: Behind the US Dollar’s Decline, May 2025
- Morningstar. Why U.S. Equities Have Beaten International Equities Since 2010, July 2023