The Most Compelling Case Yet for These Stocks

By now you may have heard a thing or three about the desirability of investing in foreign markets. And there are some compelling reasons being tossed around: It's a good hedge against a falling dollar, it opens you up to a whole new world of exciting growth, and it makes you sound smarter at cocktail parties.

But I don't think we hear enough about the best reason to add foreign stocks to your portfolio.

Lunch is on me
Here it is, in a nutshell: Increasing your exposure to foreign stocks, up to a certain point, both raises your expected returns and lowers your risk. It's what Princeton professor Burton Malkiel calls "the closest thing to a free lunch in our world securities markets." Not buying foreign stocks, says Wharton professor Jeremy Siegel, "is a risky strategy for investors."

What is the optimal amount of foreign exposure? Well, that depends on a lot of factors and assumptions. In his book Stocks for the Long Run, Siegel says that you minimize risk with about 22.5% foreign exposure, while 37.8% optimally balances risk and return. Our Motley Fool Global Gains service found more recent guidelines of anywhere from 35% to 70% from groups like Ibbotson and Citigroup, and even master investors such as Warren Buffett.

But you needn't get bogged down in the fine tuning, especially if you're lacking any foreign exposure right now. Any movement in your allocation from zero percent to a minimum of 20% is a step in the right direction for your long-term financial health.

Monster returns
There's no question you can find big winners among American companies. But let me give you a strong example from my own research of why a U.S.-only strategy is like investing with one hand tied behind your back.

Of all companies valued at $200 million or more when the calendar flipped to the year 2000, some 70 increased at least 10 times in value. About fifty of those are based abroad. Digging a bit more, I found that 70% of the five-baggers also came from abroad. Here's a sampling of some of the more interesting names:

Company

Headquarters

Industry

Return Since Jan. 1, 2000

XTO Energy (NYSE: XTO  )

U.S.

Oil and gas

5,800%

Research In Motion

Canada

Communications equipment

577%

Petrobras

Brazil

Oil and gas

488%

Apple (Nasdaq: AAPL  )

U.S.

Hardware/software

680%

Bharat Heavy Electricals

India

Electrical equipment

2,404%

Chesapeake Energy (NYSE: CHK  )

U.S.

Oil and gas

951%

PotashCorp (NYSE: POT  )

Canada

Fertilizers/chemicals

1,290%

Frontline (NYSE: FRO  )

Bermuda

Oil and gas

531%

Teva Pharmaceutical (Nasdaq: TEVA  )

Israel

Pharmaceuticals

585%

Celgene (Nasdaq: CELG  )

U.S.

Biotechnology

875%

Data provided by Capital IQ, a division of Standard & Poor's; through Feb. 14, 2010.

Foolish bottom line
After reviewing all the data, Global Gains advisors Tim Hanson and Nathan Parmelee suggest a goal of about 60% foreign exposure. From there, they recommend you diversify your foreign holdings even further -- spreading your money out among emerging and developed markets, as well as into different regions and industries.

Their special report, Build the Perfect Global Portfolio, provides all the details. You can see that report, plus all their specific foreign stock recommendations, by simply taking a free 30-day trial of the service. Here's more information.

Fool analyst Rex Moore is now available in high definition. He doesn't own any companies mentioned here. Chesapeake Energy is a Motley Fool Inside Value pick, Apple is a Stock Advisor recommendation, and Petrobras is an Income Investor pick. The Fool owns shares of Chesapeake Energy and XTO Energy. The Fool has a disclosure policy.


Read/Post Comments (6) | 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 February 25, 2010, at 5:58 PM, langco1 wrote:

    buffett needs to be worrying about his own failing empire.he split his b shares to try and fool the general public into bidding it up so he can pay for his badly timed and overpriced purchase of burlington..so far buttett has found his fools to push his $50 stock toward $80...

  • Report this Comment On February 25, 2010, at 6:54 PM, demodave wrote:

    Should "Of all companies valued at $200 million or more when the calendar flipped to the year 2000l" not read "2010"? That would make more sense for Apple anyway....

  • Report this Comment On February 26, 2010, at 12:13 AM, glkolbe wrote:

    Buffet will look great on his BNSF investment when the economy turns and there is insufficient freight capacity on the highways and fuel goes to $5 @ gallon.

  • Report this Comment On February 26, 2010, at 4:59 AM, marktsgooch wrote:

    The smart investor (including Buffet) only buys & sells stocks that they understand thoroughly.

    Adding foreign markets to the mix adds a whole load of extra factors to the calculations, including subtle factors like 'cultural differences'. If you understand all those extra factors, then go for it. If you don't, then you are better off carefully selecting stocks closer to home, which you have a much better chance of understanding. IMHO.

  • Report this Comment On February 26, 2010, at 8:47 AM, Lostnconfused wrote:

    I'm a bit surprised at Tim and Nathans' one size fits all approach.

  • Report this Comment On March 01, 2010, at 8:22 AM, mikecart1 wrote:

    I wish these articles had less filler bs and "buildup" and more straight to the point information. I feel like I'm reading the words off someone that failed essay writing in hs.

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