Why You Must Own International Stocks

It wasn't long ago that I said American investors didn't need to invest overseas. After all, the United States is the most diverse economy on the planet, the driver of global growth, and the country with -- by and large -- the best shareholder protection framework. You could (and can) get a ton of international exposure by holding U.S.-based companies such as Yum! Brands and Starbucks (Nasdaq: SBUX  ) .

I wrote these words. I believe them to be true. So why did I sign on to be the advisor for The Motley Fool's international investing service, Global Gains?

Because my own investing track record would be dramatically poorer had I not made the choice from the beginning of my investing career to comb foreign markets for great investing ideas. No, you don't need to invest overseas. But I firmly believe that everyone should own at least one international stock.

But Bill, isn't foreign investing risky?
After all, that's the message we get from the weathervanes on financial television. One person will say, "I am taking my allocation in international up to 30%," and another will say, "Wow! That's really aggressive!" The implication is that the more money one allocates outside the United States, the higher the absolute risk level.

What utter rot.

The thought that BP (NYSE: BP  ) is riskier than TiVo  (Nasdaq: TIVO  ) just because the former is based in London rather than California is absurd. BP generates billions in free cash flow each year, while TiVo has yet to generate positive free cash flow in its history as a public company.

As a group, international stocks are no more risky than U.S. stocks. Foreign companies offer substantial diversity in the same exact way that U.S. companies do, from the massive cash flow-rich China Mobile (NYSE: CHL  ) to the surging Potash (NYSE: POT  ) to the high-technology giant Taiwan Semiconductor Manufacturing (NYSE: TSM  ) .

In fact, they may be less risky. Over the past five years, people who invested heavily in overseas companies have seen a powerful benefit from diversification as the U.S. dollar has dropped in value against nearly every major currency. That means earnings denominated in pounds, dinars, rupees, or won are worth more for people who invest in dollars.

The fact that so many money managers pooh-pooh foreign investing as being "riskier" is the exact reason why you should look there. Think about it: The foreign markets in aggregate exceed the size of all U.S. stocks, yet a 25% allocation to foreign stocks is considered "aggressive." Hmmmmm. Sounds to me as though most investors underallocate to foreign companies. I'd be perfectly comfortable putting 100% of my money overseas. If anything, the types of industries available are more diverse than what's available in the United States.

Yes, it is risky -- but probably less than you think
All investing has an element of risk to it. But the U.S. market has underperformed many international markets for the better part of this decade, for the very reason that capital invested in China, India, even Brazil has generated higher returns. I don't expect this condition to reverse itself long term, and with the recent savaging of markets around the globe, we're seeing some pretty intriguing bargains from Taiwan to Finland to Canada.

The Foolish bottom line
At Global Gains, we focus on finding great international businesses offered at prices that underestimate potential gains. We don't seek out the hot markets, or the sizzling industries -- we're not going to get caught up in the next ethanol rage, for example. We seek foreign companies with excellent prospects for long-term profitability, and we try to buy them at a good to great price.

To date, our results are promising: We're beating every benchmark that we track ourselves against. I encourage you to join Global Gains free for 30 days, take a look at the stocks we're recommending, and consider adding some of them to your portfolio.

But even if you don't join us, I do hope you will take it upon yourself to stop being afraid of foreign stocks. Most of the world's biggest gains will come from companies beyond our shores -- it would be a pity to miss them because the talking heads tell you to set your sights closer to home.

This article was first published Feb. 19, 2008. It has been updated.

Bill Mann's impression of Matthew McConaughey does not involve taking his shirt off, and we can all be thankful for that. Bill does not own shares in any company mentioned in this article. Starbucks is a Motley Fool Stock Advisor and Inside Value recommendation. The Motley Fool owns shares of Starbucks. The Fool has a disclosure policy.


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