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Investors have a strong bias to invest in companies that they know well. But investing in what's familiar doesn't always give you the best returns.
For decades, many U.S. investors have been reluctant to send their money far away from home by investing in international markets. Even conventional wisdom among financial advisors is to limit international exposure in stock portfolios to a very small proportion, often around 10%. That can sometimes be a winning strategy, but in 2012, focusing so strongly on U.S. stocks cost investors some substantial gains in booming overseas markets.
Where the gains were
Of course, investors in the U.S. market can't feel too bad about their absolute performance. With the S&P 500 gaining about 14% for the year including dividends, owning domestic stocks wasn't a big handicap for strong portfolio returns.
But compare those figures with returns from the hottest markets in the world, and you'll realize that you missed out on some great opportunities. Here are just a few, with return figures from the Dec. 22 issue of The Economist:
- Mexican stocks rose nearly 30% in dollar terms, as a rising peso combined with improving business conditions helped boost the overall economy there to a roughly 4% growth rate in GDP. Cement giant Cemex (NYSE: CX ) posted gains of more than 70% as gains in the U.S. housing market helped the stock reverse a long slide in recent years.
- Many investors have written off Europe as a lost cause, but those who bought stocks have largely seen impressive returns. Markets in Germany, Austria, France, and even Greece were among the many stock markets that beat the U.S., and in Switzerland, favorable climates for ag specialist Syngenta (NYSE: SYT ) and watchmaker Swatch Group helped contribute to the Swiss market's 20% gain. In Eastern Europe, Poland pushed ahead by an even more dramatic 40%.
- In Asia, much of the attention went to Japan and China, both of which suffered subpar returns in 2012. But elsewhere, India saw better than 20% gains, as Tata Motors (NYSE: TTM ) soared by roughly 75% in the wake of its strong auto sales in the region and HDFC Bank (NYSE: HDB ) climbed more than 60% on optimism about the nation's overall economic climate. Markets in Thailand, Singapore, and Pakistan also provided enviable performance.
Admittedly, some international markets didn't fare as well. In addition to already-mentioned China, the once-hot Brazilian stock market gave back ground, due mostly to its government's conscious attempt to devalue its currency relative to the U.S. dollar and other foreign currencies. Moreover, economically ravaged Spain saw declines, even though Banco Santander (NYSE: SAN ) recovered from its worst levels from the summer months to post a slight gain for 2012.
Picking the cream of a larger crop
When you think about it, though, investing internationally can only help you. When you stick with only U.S. stocks, you artificially limit yourself to certain players in the global markets. Although many U.S. companies dominate their industries and have extremely promising growth prospects, they certainly don't have a monopoly on providing strong investment returns.
During the 2000s, attentive investors learned not to ignore international stock markets. Even as the U.S. market recovered in the years following the big bear market from 2000 to 2002, emerging-market stocks soared, outpacing domestic stocks by a wide margin. Strong growth rates in emerging economies helped boost their home-country stocks, and although U.S. multinationals participated in the boom, they nevertheless weren't able to capture all of the gains from those economies.
The key, though, is not to invest internationally expecting automatic success. Global investing is often more challenging than choosing stocks in the U.S. because you have to deal with obstacles like language barriers and foreign accounting systems that don't always translate well to the standards you're used to seeing from U.S. companies. Yet when you find a company that's a true winner, it shouldn't matter where it's located -- as long as it makes good on its profit potential in the long run.
Expand your horizons
If you weren't happy with your returns from U.S. stocks this year, take a hard look at how much of your portfolio you have invested in companies that are located overseas. Boosting your allocation to international stocks can bring big benefits in your long-term investing success.
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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.