All they have lost is luck. And next time, when the stock goes up, they should remember that that was luck, too. Whether it is bad luck or bad analysis, stock-market losses can still sting. If the loss really grates, that may mean you bet too heavily on the losing stock and that you might be better off owning stock mutual funds, which don't suffer the same nail-biting price swings. That doesn't mean international diversification isn't needed or doesn't work.
International diversification is about reducing risk before the fact.
In 1990, no one knew the U.S. would be the hottest market for the decade. Similarly, today no one knows which region will be the hottest market. That's why we diversify internationally. Of course, if you could figure out in advance which markets and sectors will perform best, you would buy only those investments. But nobody can consistently make such market calls, so it makes sense to spread your bets.