The Investing Phenomenon You Ought to Know by Now

The Wall Street Journal recently ran an eye-opening story about "the lost decade" of stock market returns:

The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period [March 1999 to March 2008], trounced even by lowly Treasury bonds. (emphasis mine)

A lot of pain, not much gain
But wait just a second. "Stocks," in the context of the excellent Journal story, means "U.S. stocks only." And while it's true that U.S. stocks have remained essentially flat over the past nine years -- Time Warner (NYSE: TWX  ) , Pfizer (NYSE: PFE  ) , and Merck (NYSE: MRK  ) are even or even worse -- most American investors have done much better. Consider this data from the Investment Company Institute:

Since 2004, investors have significantly reduced their net purchases of domestic stock funds. Funds investing in foreign companies garnered a record $148 billion in new cash in 2006 ... the robust demand for these funds reflected, in part, the strong performance of many foreign stock markets, especially when compared with returns in the U.S. stock markets.

If we assume that U.S. stock jocks followed the lead of U.S. fund investors, it means ours is a nation of global investors. And it's a good thing; check out the nine-year returns from that Journal story:

Asset Class

Annualized Return, March 1999 to March 2008 (not inflation-adjusted)

$10,000 Turned Into ...

S&P 500

2.5%

$12,489

Developed-Country Stocks

7.2%

$18,696

TIPS (Treasury Inflation Protected Securities)

8.4%

$20,666

Small-Cap Stocks (U.S.)

11.9%

$27,509

REITs

14.1%

$32,777

Commodities

17.9%

$44,017

Emerging-Markets Stocks

19.4%

$49,322

Source: Morningstar, as cited in The Wall Street Journal.

While investors owning nothing other than an S&P 500 fund would have lost out -- by a substantial margin -- to every other asset class, the plain facts show that many Americans wised up and put the power of international investing to work.

For instance, let's take a very conservative allocation and say you'd done 80% in the S&P 500 and 20% in developed-country stocks -- investing in mega-cap stalwarts such as BP (NYSE: BP  ) and Vodafone (NYSE: VOD  ) . That more conservative approach to foreign exposure would've brought in another $1,251 on a $10,000 investment. (For purposes of this simple example, I have not factored in fund expenses.)

A blend of 80% S&P, 10% developed-country, and 10% emerging-markets (that is, names like China's Baidu.com (Nasdaq: BIDU  ) and India's Infosys Technologies (Nasdaq: INFY  ) ) would have made that same $10,000 portfolio $4,314 more valuable.

All of this begs a question you had to know was imminent: Are you invested in equities based outside the U.S. of A.?

Well?
You should be. Maybe I'm preaching to the choir; the story of global economic growth, particularly in BRIC countries (Brazil, Russia, India, China), is probably well-known by now. Indeed, a recent Harris Interactive/Financial Times poll found that one in four Americans believes that China will be the dominant world power by 2020.

Maybe you're one of those four; maybe not. Either way, as someone trying to build wealth through the stock market, by now you ought to know the phenomenon known as global investing.

What have you done for me lately?
Specifically, there are three reasons to put a portion of your portfolio in foreign companies.

1. More opportunities. Many of the great economic growth stories are happening in places like India and Brazil. Also, more than half of the world's market capitalization exists outside our U.S. market. If you want to find the most promising investments for your future, why would you willingly rule out more than 50% of the choices?

2. Currency diversification. If you live and work in America, and are paid in U.S. dollars and have your savings in U.S. institutions, and on top of that invest exclusively in U.S. equities ... with a sinking dollar, you're doing yourself a disservice.

3. Hot returns. Disclaimer: Performance-chasing is foolish and costly. With that out of the way, the returns of foreign markets have been flat-out sizzling, especially when compared with our domestic results. In 2007, for instance, of 58 Dow Jones global indexes, the U.S. placed 50th.

And ... the caveat
Now, all that said, it's not as simple as dropping a line in the water and pulling out a fish for dinner. Just last weekend, The Washington Post ran a story under the headline, "As Strains Go Global, It's a Time to Pick and Choose Abroad," which spoke to some of the struggles once-hot markets have experienced in 2008.

Translation: Discerning stock-picking is imperative ... so be diligent in your research. Or if you need a place to get started, come see our Motley Fool Global Gains team's handpicked foreign stock recommendations.

You can see them all, including the top five ideas for new money right now, with a free 30-day trial. There is no obligation to subscribe.

Brian Richards does not own shares of any company mentioned. Brian ought to know many things by now, but he doesn't. Pfizer is a recommendation of both Motley Fool Inside Value and Motley Fool Income Investor. Time Warner is a Stock Advisor selection, and Baidu is a Rule Breakers recommendation. The Fool has a disclosure policy.


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