Before we get to the opinions, here are the facts:
- Over the past five years, the U.S. dollar is significantly down against the euro, the Canadian dollar, the Japanese yen, the Chinese yuan, and the British pound.
- The U.S. trade deficit in August was $69.9 billion.
- The United States is $8.6 trillion in debt.
- Our GDP growth rate clocked in at a dismal 1.6% in the third quarter -- and that number may very well be inflated.
In other words, our country's economic position in the world is weakening. And that has a significant effect on your portfolio.
Consider the currency effect
For a simple example, think about what happens to your wealth if it's stashed solely in dollars. As the dollar devalues, your savings devalue, too. (Thank you, Captain Obvious.) So just as you need to overcome inflation to maintain your portfolio's purchasing power, you also need to think about overcoming what has become quite a weak currency in the world.
One way to combat a weakening dollar is to own shares of companies that do business in other currencies. Indeed, that's a tack that's been embraced by Warren Buffett and Charles Munger at Berkshire Hathaway (NYSE: BRK-B ) . As Buffett wrote in a recent shareholder letter, his preferred method of acquiring non-dollar exposure is "by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally."
But Buffett isn't purchasing just any old foreign equity. No, he's looking for the world's best stocks to get both positive currency effects and the growth investors can expect from owning shares of superior businesses. That may have been the reasoning behind Berkshire's purchase of Israeli metalworking company Iscar last May, as well as one of the reasons he's been buying shares of companies that have been growing their international sales, such as Johnson & Johnson (NYSE: JNJ ) and Wal-Mart (NYSE: WMT ) .
But what about the economy collapsing?
There's also a debate brewing among some of the world's best financial minds about whether the United States can continue to post record trade deficits without eventually defaulting on its obligations and triggering a massive economic collapse with global ramifications. Again, this isn't a sure-thing scenario, but it's something that a lot of smart people are spending time worrying about. John Mauldin can catch you up on some of the finer points here (free registration required), but suffice it to say that even if the economy does not collapse, as the U.S. debt picture becomes bleaker, each U.S. dollar becomes a little bit less valuable.
That means that if you invest only in the United States, on a global scale, your gains won't be as good and your losses will be worse compared to those earned by investors who diversify their portfolios across currencies. And if you're invested only in the United States, and the U.S. enters a lasting recession, your losses could be catastrophic.
Indeed, when my Foolish colleague Rich Smith asked Mauldin for some recommendations recently, he was quite bearish on domestic stocks. Rather, "I like Eastern Europe, Canadian tar sand plays, and resource plays in general. China is of great interest to me, and I am devoting some time to looking at a few opportunities over there."
The down dollar
Asset plays and foreign equities: These are strategic moves that smart investors are making to differentiate themselves from the dollar. Indeed, it's one of the reasons why commodity-related stocks such as Glamis Gold (NYSE: GLG ) , Lihir Gold (Nasdaq: LIHR ) , Barrick Gold (NYSE: ABX ) , and Newmont Mining (NYSE: NEM ) have made such strong runs recently.
But commodity investing can be a dangerous business. In fact, as Jeremy Siegel wrote last May, gold has returned just 2% per year since 1802. That's right, just 2% per year.
Fool's final word
In the end, I am wary of the dollar yet confident that equities remain the superior asset class for long-term investors. There are simply too many smart minds saying the same things and too much evidence to support both of these conclusions. Therefore, it's absolutely crucial for individual investors like you and me to start making foreign businesses a larger part of our portfolios. That tack is a clear path to better returns and diminished risk.
It's for this reason that we just launched our brand-new Motley Fool Global Gains international investing service. Led by senior analyst Bill Mann, the goal of the service is to make sure that more Americans can find, understand, and invest in the world's best companies.
But even if you don't have any interest in checking out the service free for 30 days, I hope you'll give some thought to adding foreign equities to your portfolio. As Warren Buffett is reported to have said at Berkshire's annual meeting this year, he's going to be spending this fall searching for more suitable global investments like Iscar. And if looking abroad is worth the time of the world's greatest investor, then let me humbly submit that it's probably worth your time, too.
Tim Hanson does not own shares of any company mentioned. Berkshire Hathaway and Wal-Mart are Inside Value recommendations. Johnson & Johnson is an Income Investor pick. The Fool's disclosure policy assures you that no stocks were harmed in the writing of this article.