The Closest Thing to a Free Lunch

Getting some international exposure in your portfolio may be one of the best things you can do as an investor. Why? Because such exposure -- whether through individual stocks, mutual funds, or exchange-traded funds -- generally provides you the same or even higher potential returns but at lower risk.

Burton Malkiel, a Princeton professor, drove this point home for me many years ago in his book A Random Walk Down Wall Street. I never forgot this paragraph concerning his 21-year research period from 1977 to 1997:

It turns out that the portfolio with the least risk had 24% foreign securities and 76% U.S. securities. Moreover, adding 24% [Europe, Australia, and Far East] stocks to a domestic portfolio also tended to increase the portfolio return. In this sense, international diversification provided the closest thing to a free lunch available in our world securities markets. When higher portfolio returns can be achieved with lower risk by adding international stocks, no individual or portfolio manager should fail to take notice. [Emphasis mine.]

Lunch time
The greater degree of diversification found in international stocks is what provides this "free lunch." Different economic conditions, different business cycles, and varying returns in foreign markets provide the diversification -- and the resulting benefit.

I certainly heeded Malkiel's advice and have always maintained a good international presence in my own portfolio. Fortunately, it's not as hard as you might think. Many foreign companies can be found on the NYSE or Nasdaq. Here's a small sample (but not a "buy list") to illustrate my point:

Company	Headquarters
GlaxoSmithKline (NYSE: GSK)	United Kingdom
TOM Online (Nasdaq: TOMO)	China
UBS (NYSE: UBS)	Switzerland
DaimlerChrysler (NYSE: DCX)	Germany
PetroChina (NYSE: PTR)	China

If you prefer to stay with a U.S.-based company, you're not out of luck -- just check the financial statements for net sales broken down geographically. For example, "American" firms Apple (Nasdaq: AAPL) (51%) and Google (Nasdaq: GOOG) (47%) have large portions of their sales recorded overseas.

More reasons
There are many reasons other than diversification to consider international stocks for your portfolio. As Motley Fool Global Gains advisor Bill Mann points out, more than half of the world's market cap lies outside the United States. Many foreign economies are growing at a much faster rate than America's. And since many overseas companies are virtually unknown outside their own region, there are many undervalued opportunities out there.

Nothing is guaranteed, but it's clear we should be looking outside our own borders for the chance to boost returns while reducing risk. If you'd like to see what ideas Bill and his team are tossing around in Global Gains, you can sign up for free access and view the team's newest recommendations with no obligation. Here's more information.

Global Gains advisor Bill Mann is currently traveling in China, India, and Taiwan in search of new investment opportunities in these fast-growing economies. Get his updates and analysis live from the field by sending Bill an email at BillTrip@Fool.com.

This article was originally published on Dec. 14, 2006. It has been updated.

Rex Moore's portfolio has exposure to such foreign places as China, Europe, and New Jersey. He does not own shares of any company mentioned in this article. GlaxoSmithKline is a Motley Fool Income Investor recommendation. TOM Online is a Stock Advisor selection. The Fool has a disclosure policy.