Until 2008, stock markets in foreign countries went nuts for several
years running. From 2004 to 2007, world stock markets, as measured by
the MSCI EAFE index, rose at a faster pace even than stocks here at
home -- 17% annually, compared to just 9% for the S&P 500.
Fear and greed
With such strong past
performance, you'd expect average investors to jump on the
international bandwagon. And so they did; mutual fund flows favored
international stocks over domestic for much of that time frame.
But just as the rise of real estate investment trusts (REITs) in the
late '90s finally gave way to a long-awaited fall, international stocks
suffered in the 2008 bear market. This caused fundamentally sound
companies such as Petroleo Brasileiro (NYSE: PBR), Unilever (NYSE: UL), and Taiwan Semiconductor (NYSE: TSM) to drop substantially.
In addition, the U.S. recession has sent waves of fear rippling
around the world. But that doesn't mean that the Shanghai index and
other international markets won't rebound to new highs -- they've
already resumed their upward motion in the recent rally. Like a game of
musical chairs, you don't want to be the last one to buy into soaring
international stocks before a major correction occurs, but you also
don't want to be the last to recognize when it's time to get back in
the game.
Is 10% enough?
Traditionally, many financial
advisors recommended that investors keep most of their stock
investments within the U.S., typically allocating just 10% or so to
foreign stocks. Planners argue that lower levels of investing
regulation, less transparent financial disclosure, and political and
economic instability support a conservative approach to allocating
money to foreign markets.
However, just as REITs benefited from planners' increasing
willingness to divert some of a client's fixed-income allocation away
from bonds, advisors are now taking a second look at the 10% rule for
international stocks. As the global economy continues to evolve,
national identity among corporations becomes less important every year.
Perhaps the most obvious example is the automotive industry, where Japanese manufacturers like Toyota (NYSE: TM)
have built plants in the U.S., while American automakers maintain
manufacturing plants around the world. But you can also see it in
companies such as Transocean (NYSE: RIG), Noble (NYSE: NE), and Tyco International (NYSE: TYC), which are choosing to move operations abroad for tax advantages.
Given that the U.S. economy makes up only about a quarter of the
world's gross economic product, ratcheting up international stock
allocations, even by an additional 5%-10%, makes plenty of sense. It
could also have a huge impact on stock valuations going forward.
It's true that even if you only own American stocks, you still have
a wide exposure to the worldwide economy. However, just as diversifying
across sectors of the economy is prudent to avoid risks to specific
types of companies, diversifying across national borders can give you
some protection against an economic downturn that hits one particular
country.
International investing advantages
One
other objection many investors have is that learning about companies
across the world can be more difficult than researching U.S. companies.
The nuances and subtle differences in the way people do business around
the world require analysts to think outside the box when judging how
well a company might be able to perform in the global marketplace.
The Fool started its international investing newsletter, Motley Fool Global Gains,
in part to help shed more light on investing opportunities available
overseas. But it's not just a stock-picking service. Along with monthly
recommendations, you also get informative commentary about particular
industries, general economic conditions, and business practices in
different regions of the world. Global Gains can give you the comfort you need to expand your investing horizon beyond America's shores.
© 2009 UCLICK L.L.C.
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