The U.S. stock market has made long-term investors rich for decades. But if you only own U.S. stocks, you've got a huge hole in your portfolio -- one that could cost you plenty in the years to come.
Welcome to the global economy
For years, many financial planners treated foreign stocks as an afterthought. While U.S. stocks were subject to securities laws and SEC supervision that helped to protect investors, foreign stock exchanges were seen as unregulated free-for-all markets, where inexperienced investors could easily lose everything.
Even now, many advisors still see foreign markets as riskier than the U.S. -- and as a result, many small investors restrict their overseas investments to a token percentage of their overall portfolio.
But smart investors know better. Guidelines from top institutions, along with renowned individuals such as Warren Buffett, suggest a much larger allocation of your overall portfolio to global investments. In a world where globalization has taken control of economic activity, you can't afford to have a protectionist bent when it comes to investing your own capital.
Enter a global portfolio
That's one reason why the international investing experts at our Motley Fool Global Gains newsletter recommend that you invest fully 60% of the money you have allocated toward stocks in companies outside the States. That may seem like a lot, but it's in line with the amount of economic activity that occurs beyond our borders. Without that level of exposure, you're making a disproportionately large bet on U.S. stocks -- a bet that has worked out well in the past, but which may not work nearly as well in the future.
The world's a big place, though. Once you decide to invest the majority of your stock allocation in overseas stocks, the next choice you have to make is how much to put where. Emerging markets like Brazil and China have been all the rage in recent years, but well-established countries like Germany, Japan, and the United Kingdom have plenty of strong companies that have been good long-term investments for shareholders.
One solution is simply to split your money evenly between developed and emerging international markets. That leaves you with the following:
- Forty percent of your money in stocks that primarily do business in the U.S., including companies with global presence such as McDonald's (NYSE: MCD ) , Wal-Mart (NYSE: WMT ) , and Johnson & Johnson (NYSE: JNJ ) .
- Thirty percent invested in developed-market stocks such as Toyota Motor (NYSE: TM ) and GlaxoSmithKline (NYSE: GSK ) .
- Thirty percent in emerging-market companies like Vale (NYSE: VALE ) and Shanda Interactive (Nasdaq: SNDA ) .
But it's not enough just to pick companies arbitrarily. Ideally, you want to make sure you have the best companies you can find anywhere -- ones that have the greatest opportunities for growth not just in their home countries but around the world. As globalization continues to take root, increased competition in what used to be locally dominated markets will likely shake up existing industry structures across the globe, leading to the same kinds of upheaval in other countries that we've already seen here in the U.S. in the manufacturing industry. You want to make sure you own the right players in that fight.
Buy the right stocks
The folks at Global Gains have made that task a little easier for you, suggesting three model portfolios with more precise allocations between various areas of the developed and emerging world that will give you broad geographic diversification. Whether you're a conservative investor with a limited time horizon or an aggressive investor with more latitude to take big risks, those model portfolios can guide you toward the right mix of international stocks for you.
Whatever you do, though, don't ignore the place of international stocks in your investing strategy. Limiting your investing to the U.S. could limit your future returns, making you pass up amazing opportunities that others will cash in on. By looking abroad, you can grab your share of money-making stocks before most investors catch on.
For more on the best stocks around the world, read:
RSS Headlines
Fool UK