Does International Diversification Protect You? Global Stocks in Every Crash Since 2008

Over the months the S&P 500 fell from its peak to its bottom in each crash, here is how the three funds moved.

In the 2008 financial crisis, US stocks fell about 57%, developed markets about 62% and emerging markets about 64%. In the 2022 bear market, US stocks fell about 26%, developed markets about 30% and emerging markets about 28%. In the 2020 COVID crash they fell together: about 35% for US stocks, 34% for developed markets and 31% for emerging markets.

Only in the late-2018 selloff did going abroad clearly soften the fall inside the window, about 18% for developed and 10% for emerging markets against about 21% for US stocks, and even that flatters them: international stocks, emerging markets above all, had been falling since early 2018, so much of their drop came before this window began. On this record, international stocks have not been a crash cushion. In the two deepest falls they fell further.

Three things tend to happen together in a crash. First, the shock is usually global: banks everywhere were caught in 2008, the pandemic shut down every economy at once in 2020, and in 2022 interest rates rose around the world. Second, when investors panic they sell almost everything that is risky, wherever it is listed, so markets that normally move somewhat apart start moving together.

Third, the US dollar tends to rise in a panic, as money runs to it for safety. It rose in 2008, 2020 and 2022. A fund that holds European or Japanese shares is priced in dollars for a US investor, so when the dollar rises, those shares are worth fewer dollars even if their home price held steady. Part of what international stocks lost in these crashes, measured from the US, was the currency.

The bigger difference came after the falls. By price, US stocks were back at their 2007 high about 47 months after the 2009 bottom. Developed markets took about 147 months, roughly 12 years, and emerging markets about 207 months, roughly 17 years: the emerging-markets fund only got back above its 2007 price in 2026.

Two things make those numbers look worse than an investor actually lived. International funds have paid higher dividends than US funds, so with dividends reinvested they got back years sooner than their price alone suggests, though still well behind US stocks. And a strong dollar through much of the 2010s pulled their dollar prices down. After 2022 the pattern repeated on a smaller scale: about 23 months for developed and 33 for emerging markets, against about 16 for US stocks.

Everything above is measured in US dollars. For a Canadian or UK investor the same crashes looked different. The Canadian dollar and the British pound both fell against the US dollar in 2008, 2020 and 2022, so a Canadian or British investor's US holdings lost less when counted back in their own money, and their home-market shares behaved like the foreign ones do for an American.

The lesson travels, though: whichever currency you count in, the world's stock markets have tended to fall together in a crash. What changes is how much a currency move cushions or deepens the fall, and that is worth seeing on your own holdings, in your own currency.

If international stocks do not cushion a crash, why own them? Because diversification works over decades, not weeks. No one knows which country's market will lead the next ten or twenty years. In the decade from 2000 to 2009, the S&P 500 ended below where it started while international stocks, emerging markets above all, did better. Since then the US has led by a wide margin. A global portfolio does not try to guess which story comes next.

Crash protection is a different job, and on this record it belongs to bonds and cash, not to a different set of stocks. A portfolio that is all stocks will fall hard in a global crash whether those stocks are in one country or forty.

The useful question is not whether international stocks are good, but what your mix of home and foreign stocks would have done. Backtest your portfolio as it is and with a different share abroad, compare the maximum drawdown, the recovery time and the total return with dividends, then replay both through 2008, 2020 and 2022 in the stress test. Tools on this site show results in your portfolio's own currency, so a Canadian or UK mix is measured the way you would have lived it.

Educational, not advice: how much to hold abroad depends on your goals, your horizon, your currency and everything else you own.