The obvious can help you. So says a recent article that appeared on the front page of The Wall Street Journal's "Money & Investing" section. The article, "It's a Small World After All," pointed out that small-cap stocks have been outperforming large-cap stocks, and that foreign stocks have been outperforming U.S. stocks. Ergo, we can all earn better returns by investing in foreign small-cap stocks.
Eureka!
All kidding aside
While it's a fairly obvious observation, I'm not one to eschew the obvious. After all, when I revealed the 10 best-performing stocks of the past 10 years, I received two types of email. The first excoriated me for making an obvious and unhelpful point. To paraphrase these always-classy correspondents: "Of course the best-performing stocks of the past 10 years started small."
The second set of emailers enjoyed the article. They found the data interesting and helpful.
Now that I'm done patting myself on the back...
The underlying point here? Small companies rank among the best performers on both foreign and domestic exchanges. That makes sense: Small companies have more room for growth than larger ones. As a result, individual investors should make room for small companies in their portfolios -- whether they add a 10%, 20%, or even 30% slug.
Moreover, the prospect that foreign small caps will outperform domestic small caps also makes sense. One of the most important factors for small-cap success is a wide market opportunity. Given the U.S. economy's slowing growth, and the accelerating growth of foreign markets, more wide market opportunities today exist outside of the United States. As a result, individual investors should also make room for foreign companies in their portfolio -- whether they add a 10%, 20%, or even 30% slug.
As for the importance of foreign small caps? Well, you can see where I'm going with this.
A case study
Consider, for example, the auto industry. Here in the United States, it's a moribund and mature segment of the market. General Motors
Contrast that situation with China or India. In these countries, passenger car sales are growing rapidly alongside the rise of a middle class. As a result, smaller automotive companies such as Tata Motors
The Foolish bottom line
This isn't just true of the auto industry. Across international markets, smaller companies are trying to gain a foothold in rapidly expanding economies in order to grow into the giants of tomorrow. We're focused on finding these companies at our Motley Fool Global Gains international investing service, combining expertise in both small-cap and international investing.
Not all of our picks will be small caps, but they'll make up a good portion of the portfolio. Furthermore, given the economic growth abroad, we believe we can also find a number of large companies that will offer extremely attractive rates of return. That may be an obvious point, but it's one worth repeating.
If you'd like to see all of our research, and the stocks we're recommending at Global Gains, you can click here to try the service free for 30 days. There is no obligation to subscribe.
Tim Hanson does not own shares of any company mentioned. The Fool's disclosure policy advises all prospective emailers -- San Diegans or no -- to stay classy.
