You Have No More Excuses to Ignore These Stocks

It's official: You are now out of excuses to ignore foreign stocks for your portfolio.

Why? Because a big, beleaguered bank says so!
The Wall Street Journal reported that Citigroup has advised investors to tilt their stock portfolios up to 55% toward foreign exposure, up from their current levels of 30%.

That's even more aggressive than the then-shocking 40% that Wharton wiz Jeremy Siegel recommended in his 2005 book The Future for Investors. Siegel saw a world economy growing much faster than our own: "We must look to these changes taking place in our global economy as opportunities and not as threats. Huge markets await those willing to tackle them."

The evidence, though, shows that not many U.S. investors are willing to actually tackle them. According to the Journal, the typical American mutual fund investor "holds 12% to 15% in foreign stocks -- or half that in a 401(k)."

That's putrid.

Perhaps even more putrid is that some American investors are actually against investing in foreign stocks. Indeed, a reader comment from Tim's recent article -- about a stock posed for extraordinary growth -- is illustrative:

Why do we have to spend so much time discussing non-American stocks? I really don't care if I could make more money investing in Chinese or other foreign companies, because on principle, I refuse to invest in anything but American companies. I can't imagine that I'm the only one who believes it's best to keep American money in America, so it would be really nice to get more articles about American stocks.

Sigh
Although we understand the gentleman's sense of patriotic pride, xenophobia has no place in investing. The fact of the matter is that we must all adapt to an increasingly globalized world where the line between "ours" and "theirs" has become blurred -- and will only get more blurred.

Though this can seem frightening, we view it as good news … because it can benefit us all.

For example, just as Japan's Toyota (NYSE: TM  ) has profited by selling cars (including the first commercially viable hybrid) in the United States, New York-based Coach (NYSE: COH  ) generates nearly 20% of its revenue in Japan.

Then there's iconic "American" companies such as Nike (NYSE: NKE  ) , Intel (Nasdaq: INTC  ) , Apple (Nasdaq: AAPL  ) , and Gap (NYSE: GPS  ) , which actually do a lot of their manufacturing abroad -- in places such as Vietnam, China, and Cambodia. Conversely, Toyota has eight manufacturing plants right here in the U.S. of A. And remember that before Belgian/Brazilian conglomerate InBev bid for Anheuser-Busch (NYSE: BUD  ) , Anheuser-Busch bought significant stakes in Mexico's Grupo Modelo and China's Tsingtao.

It's a waste of time trying to decide which one of these companies is the "most" American. What is important, however, is that every one of these companies, American or not, is focused on selling more products in rapidly growing emerging economies such as China, India, and Brazil. That's because, when compared with our domestic market, these underpenetrated markets offer more growth potential over the next decade.

That's also true of their stock markets
As these economies develop, their stock markets will rise. You can go along for the ride if you're ready, willing, and able.

But if you refuse to invest there -- or are too frightened by the volatility to commit to a disciplined long-term international investment strategy -- then you will miss out.

Another word about international investing
We agree with the emerging consensus that 12% foreign equity exposure is low any way you cut it. Because not only do foreign stocks offer heightened growth potential, but they can also give your portfolio some needed diversification from the American economy.

Yes, it's true that Europe and Asia have been hit by the same economic troubles currently causing panic in the United States. But if you live here in the U.S., you probably own U.S. equities, have a U.S. job, get paid in U.S. dollars, and have all of your savings denominated in those dollars. If or when something goes haywire, you're dangerously concentrated in one specific geographic region.

Though we're confident that our country will rebound from the current malaise, it will take time. Stock and real estate markets are down. Interest rates are low. The dollar is volatile. GDP growth ranges from anemic to nonexistent. This terrible confluence of economic weakness should serve as a wake-up call that you need to make foreign stocks a larger part of your portfolio going forward.

In other words, you have no more excuses to ignore these stocks
At our Motley Fool Global Gains international investing service, we believe we're finding some of tomorrow's next great stock market success stories by looking abroad. With the haircuts some of the world markets have experienced in the past eight months, many of our recommendations are trading at extremely attractive prices.

You can see our team's top five foreign stocks, and you can join our growing community of investors, with a 30-day free trial. Just click here to get started.

Brian Richards and Tim Hanson have no more excuses for ignoring the power of juicing with Jack Lalanne's Power Juicer. Neither Brian nor Tim owns shares of any companies mentioned. Intel is an Inside Value recommendation. Gap is a Stock Advisor and an Inside Value selection. Apple and Coach are Stock Advisor picks. The Fool's disclosure policy regrets that first-round Tom Brady fantasy draft pick.


Read/Post Comments (18) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2008, at 2:14 PM, jerhoad wrote:

    And Citigroup is a model for proper and prudent investing? Wow. Someone's asleep at the wheel.

  • Report this Comment On October 17, 2008, at 6:58 PM, justaplugger wrote:

    Dear Ricky & Timmy;

    The only putrid aspect to this is your deriding of an investor who prefers to invest in American based companies.

    Surely a knowledgeable investor advisor could come up with atleast afew recommendations of American based stocks with reasons why. Especially when you cover your ass with the "disciplined long-term international investment strategy"! Just because you are paid to be fools doesn't mean you should be foolish with your words.

    Is Buffet frightened or xenophobic or putrid when he says he will be buying into American stocks big time?

    Hope to read something of wisdom from y'all next time.

  • Report this Comment On October 18, 2008, at 6:58 PM, kamuirei wrote:

    If you're referring to the article I think you are, Buffet's did not state that he was buying American equities instead of international ones, but stock instead of bonds in his personal account. (The title was rather misleading)

    My question is on the tax implications of international stocks in a 401k or IRA. Is it worth investing in international stocks in these tax advantaged accounts when, unless I am mistaken, you lose a significant portion of the tax benefits? (aka the going tax rate under IRS publication 901)

    Thanks.

  • Report this Comment On October 19, 2008, at 11:02 AM, SteveTheInvestor wrote:

    And I should listen to Citi? They have done such a fine job managing their own affairs, as reflected in their balance sheet and stock price.

    I'm all for diversification but it seems to me that the global economy is just that.... investing stinks the world over.

  • Report this Comment On October 19, 2008, at 5:00 PM, jeffduby wrote:

    Almost all the research I've done indicates that foreign markets will be hit much harder in the next one-two years than the American markets have been.

    The Chinese stocks I've bought recently (five star stocks btw) are down over 50% in the last three weeks.

    European stocks are down a stunning 40%.

    My portfolio's American stocks are down approximately 25%. Based on these numbers alone, I think that a little "xenophobia" might be what the Foolish investor needs. Investing in economies that are reccomended to you, but are cloudy to you is a very dangerous venture. As an example, less than a month ago Barron's was advising people to deposit their savings in Icelandic banks because they were paying out 16 plus percent. oops...

  • Report this Comment On October 20, 2008, at 4:28 AM, BoTom wrote:

    Jeffduby, did that research you've done also come to the (correct) conclusion that the USA is in a recession, while most of the rest of the world is not (yet) and maybe even wont enter one? Not every country and company depends on the american buyer. And most of them did not play the american game of drowning in debt - and they knew the beneftis of savings instead of blowing every cent. Quite a few markets will come out of this mess ahead of the US.

    60% of my portfolio is US based but I do intend to change that (by buying more "rest of the world" stocks while still picking up some US pearls for cheap) because blind patriotism doesnt make or protect your money.

  • Report this Comment On October 20, 2008, at 10:04 AM, MatthewHSE wrote:

    I was the commenter quoted in this article, and I stand by my original statements. I should add that "patriotism" isn't the motivation nearly so much as protecting liberty.

    The real issue here is American sovereignty, which is a cornerstone of our freedom, economically and otherwise. If we continue to send American money overseas, we will see more and more influence and control exercised by governments, corporations and individuals that are often outright hostile, both to America, and to the time-tested American ideals that have helped make our country free and prosperous.

    As that process continues, the result will be the further eroding of those cherished American ideals, the loss of which will affect all of us, not only in the area the economy and free enterprise, but also in the area of personal liberty.

    And that's a higher price than I want to pay just to get a "better" portfolio.

  • Report this Comment On October 20, 2008, at 11:46 AM, Xrat wrote:

    One thing about nationalistic investing is.., wealth is relative.

    If you have $20, but your neighbour has $40 you'll feel poor and vice versa. If your neighbour is lucky (or shrewd) enough to pick the right stock in the right country, they are likely to be the only one in the neighbourhood. The rest of you will all be rubbing along at around the same rate. If they're wrong, they'll be repossessed.

    It just depends on your confidence.., are you going to be the lucky/shrewd one, or one of the conservative many?

    If the recession is, as suggested, cash flow problem, then it seems a bit unpatriotic to be helping some other country out by investing abroad.

  • Report this Comment On October 20, 2008, at 11:48 AM, jcrash wrote:

    Well, as someone who jumped on the international stock bandwagon about 6 years ago, here is what I can tell you:

    You can't just leave them sitting there as a specific allocation. When they move up, a LOT, you must take off the majority of the position over time and wait for the inevitable pull backs. When they pull back (more than once now), they do it HARD. You are much better off if you just take off all profits, move them to bonds and wait for some price 35% below where you took off the profits. It will come, and if it doesn't - you are still up so no big deal.

  • Report this Comment On October 22, 2008, at 2:49 PM, notebar wrote:

    And just what pray tell, makes an "American" stock American. Since anyone can buy shares in any company, and most companies sell and buy products from other countries; build factories in and hire workers from different countries, what makes them "American" or 'foreign". A Saudi or Chinese can own Ford, (even a majority stake) just as well as CTRIP or Garmin (registered in the Cayman Islands with manufacturing facilities in Taiwan and Kansas). Every time I get a dividend from CTRIP, that's money coming back here to the "good ol' USA", money which will be spent here at locally owned businesses, etc. If you don't like investing in foreign companies, quit using oil which only pours more money into those foreign sovereign wealth funds so they can buy "American" companies...Better yet is to "tear down those walls" (as Mr. Buffet did when he invested in Petro China) and have a direct say in how those companies are run (something only a stockholder or govt. regulator can do). There are good and bad, ethical and unethical, competent and incompetent, profitable and unprofitable companies on any stock exchange. It would be foolish (with a small f) indeed to limit investment to companies perceived as "mostly American".

  • Report this Comment On October 23, 2008, at 8:33 AM, The1MAGE wrote:

    I actually dumped my foreign fund recently. Since this is a global "crisis", I know that America will be leading the recovery.

    After that I will start rebuilding my foreign funds.

  • Report this Comment On October 24, 2008, at 1:33 PM, edwardsk2003 wrote:

    Seeing emerging markets down 65% in the last year and 62% in the last 6 months... makes it appear that (even if they go down further) currently they are cheap.

    Everyone who talks "investing" always talks about buying low and selling high, but when you mention in (as I've, and the original article did) people rip them saying... they've already dropped 50-60% unlike my US portfolio which is only down 25%... i'm waiting for it to go back up to buy...

    Isn't that 100% backwards?????

  • Report this Comment On October 24, 2008, at 3:56 PM, chemdude47 wrote:

    edwardsk2003 mentioned that emerging markets are down 65% in the last year, so they "appear" currently cheap. Well, maybe-and then again, maybe not. What has happened to the earnings of those companies in the last year? If earnings are down 65%, too, and are going to stay there awhile in a "global recession" then emerging markets are likely not cheap. But if these EM's only shed a modest % of their earnings over this year and the next year or two, then they may indeed be cheap.

    And, of course, caveat emptor: one can buy and these markets stay stubbornly cheap-or worse, get even cheaper! Who was the famous investor who said markets can remain stubbornly irrational longer than I can remain solvent?!

  • Report this Comment On October 24, 2008, at 4:09 PM, bluewren63 wrote:

    Given todays news that the rest of the world seems to be sllipping into recession, and we seem to have been there for a while, perhaps international shares have further to fall and perhaps we will pull out of it first. Why does the idea of spreading risk across different markets not hold any more? I'd rather be buying into a market that has already fallen.

  • Report this Comment On October 24, 2008, at 8:26 PM, franklybenjamin wrote:

    Putrid? That's laughable.

    That is the same kind of attitude people took in the 1930's when they shifted their portfolio exposure away from American public companies and bought shares in Krupp, Thyssen, and Bayer. When you put money into companies based in a specific country, you empower that country, its leadership, and its ideals. China is a communist country. Think about it, long and hard.

  • Report this Comment On October 24, 2008, at 9:10 PM, JFrazer1 wrote:

    If you really want to be patriotic you should help Americans own as much of the world's business as possible. It's better then the other way around, them owning us.

  • Report this Comment On October 24, 2008, at 9:14 PM, JFrazer1 wrote:

    BTW my portfolio is about 50/50 international and domestic and both have decreased about the same amount in value. Invest in good companies, not governments. Anyone who claims to know who will recover first without citing real forward data (not hindsight oriented selectively biased anecdotal shoulda coulda woulda hypothetical stock returns) is either a liar a or a prophet.

  • Report this Comment On October 25, 2008, at 6:21 AM, radass wrote:

    I agree with some of the "non-American" comments. The world economy has been always been interwined one way or the other, but not as globalized as it is now. The line between what is what is one nation's company and what isn't is mostly blurred. For example, more than 75% of Coca-Cola's sales are outside the United States as well as most its workforce. The only reason why its HQ is in Atlanta is because it is its place of origin. That's all it is!!!

    Many "American" companies conduct a good part of its business outside of the United States, if not most of it. Same goes for companies like Nintendo and Mittal from their respective bases of origin.

    The reason why more Chinese, Indian, and other companies from the developing world do their businesses more relatively within their borders compared to their U.S. and European-based counterparts is simply because those markets are continually expanding while developed countries are, well, more or less, already developed and have lower growth potential.

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