OK, friends, close those books. It's time for a pop quiz! See how many of the following questions you can answer correctly:
- Name five countries in Africa, and their capitals.
- From which country did India gain its independence in 1947, and what are the top two religions in India?
- Rank Singapore, Japan, Malaysia, China, South Korea, and Hong Kong by wealth (as measured by the Gross National Product per person).
- What is the official language of Brazil, and the main religion? Is the population of Brazil closest to 100 million, 200 million, 300 million, or 400 million?
- Of which countries are the following cities capitals? Oslo, Budapest, Nairobi, Manila, Damascus, Islamabad, Riyadh, Taipei, and Buenos Aires.
I'll get to the answers shortly, but first I want to point something out.
I suspect that, like me, you agree that a portion of your portfolio should be invested in international stocks, partly for diversification, and partly because there are plenty of economies in the world that are growing much more briskly than our own.
The T. Rowe Price Emerging Markets Stock (PRMSX) fund, for example, sports an average annual return of more than 36% over the past five years, invested in countries such as Brazil, China, South Korea, India, and Taiwan. That kind of performance would have turned $10,000 into more than $46,000 in just five years. The Vanguard International Growth (VWIGX) fund, meanwhile, with more than half its value invested in the United Kingdom, Japan, France, Germany, and Switzerland, has averaged 21% annual growth in the same period.
There are even "global" funds that invest in foreign and U.S. companies. The T. Rowe Price Global Stock (PRGSX) fund, for example, has averaged 20% over the past five years, and has roughly 40% of its assets in American companies -- such as, recently, Juniper Networks (Nasdaq: JNPR ) , Google (Nasdaq: GOOG ) , D.R. Horton (NYSE: DHI ) , Microsoft (Nasdaq: MSFT ) , and Goldman Sachs (NYSE: GS ) . Compare these worldly five-year averages with 11% for the S&P 500, and you can see the value of adding some foreign companies to your mix.
These funds aren't likely to deliver 36% or 21% each year, but they still offer a simple way to invest abroad. To improve your returns further, however, you should consider adding some individual companies to your portfolio. After all, a fund isn't likely to double in a year or three, but some stocks will. Finnish company Nokia (NYSE: NOK ) , for example, nearly doubled just in 2007. Arcelor Mittal (NYSE: MT ) returned some 87%.
Here's the problem, though: You may not be qualified to determine which international investments have a good chance of performing well. Let's see how you did on the quiz.
Here are the answers:
- A glance at an atlas or map will provide these. Here are a few: Egypt, Cairo; Kenya, Nairobi; Ethiopia, Addis Ababa; Botswana, Gabarone; Nigeria, Abuja; Ghana, Accra; Sudan, Khartoum; Morocco, Rabat; Angola, Luanda; Democratic Republic of the Congo, Kinshasa.
- Britain. Hinduism and Islam, with Hindus making up about 80% of Indians, and Muslims about 13%.
- Number one is Hong Kong, followed by Japan, Singapore, South Korea, Malaysia, and China.
- Portuguese is the country's main language, and Roman Catholicism the predominant religion. The population was recently around 185 million. (Compare that with about 300 million for the United States.)
- Oslo, Norway; Budapest, Hungary; Nairobi, Kenya; Manila, The Philippines; Damascus, Syria; Islamabad, Pakistan; Riyadh, Saudi Arabia; Taipei, Taiwan; and Buenos Aires, Argentina.
So how did you do? If you're hanging your head, don't feel too bad -- most Americans would flunk this quiz. Still, before you choose an international company to invest in, ask yourself whether you have the background to evaluate companies not only by studying their financials but also by assessing the state of their home countries' economic and political stability, their nations' financial reporting standards, and so on.
What to do
For those of us who aren't global experts, our best bet for foreign stocks might be to seek the recommendations of trusted experts in the field. I myself like to see what my colleague Bill Mann and his team at our Motley Fool Global Gains international investing service are recommending.
Try it free for 30 days and enjoy access to all past issues, so you can learn about foreign economies one stock pick at a time.