As economies around the globe continue to grow faster than our own, Vanguard and other managers of target-date funds have been hiking their exposure to foreign stocks. Fools should consider doing the same.
Last year, some of Vanguard's target-date funds (which make great retirement investments for many folks) upped their international allocations from about 20% to around 30% of their total equity holdings. This isn't a shocking concept to us at Fool HQ; the model portfolios in our Rule Your Retirement service reflect about 10% to 25% of assets invested internationally, depending on how far you are from retirement.
Plunking a quarter or a third of your hard-earned money in companies based abroad might seem like a scary proposition. After all, foreign laws and regulations surrounding investments aren't always as robust as ours. But the significant benefits of diversification should amply outweigh that concern.
We Americans need to remember that we're not the only game in town. Our economy is (usually) growing, but it's so big and mature that it can no longer grow very quickly. The U.S. recently sported GDP growth of 2.6%, while Mexico came in at 5%, South Korea at 6%, Brazil at 7.5%, India at 9.7%, and China at 10.5%. For faster growth, it makes sense to look abroad.
And when our economy sputters, diversified investments in other economies can offset that slump with their own stronger performances. A sound portfolio's holdings display a healthy balance of sizes, industries -- and nationalities.
There are lots of ways to find compelling international companies. Our Global Gains newsletter, will point you to many great foreign stocks, including Sterlite Industries (NYSE: SLT ) , which is poised to profit from India's expected $1 trillion investment in infrastructure over the coming five years.
You can also find winners yourself. The following foreign companies have been growing their revenue over the past few years, sport solid returns on equity, and have P/E ratios of less than 20:
3-Year Avg. Revenue Growth
Return on Equity
|Tata Motors (NYSE: TTM )
|JA Solar Holdings (Nasdaq: JASO )
|Teva Pharmaceutical (Nasdaq: TEVA )
|Petroleo Brasileiro (NYSE: PBR )
Data: Motley Fool CAPS, Morningstar.
Tata Motors holds considerable promise, thanks to its mix of light commercial trucks and $2,500 cars. JA Solar, based in China, is piling up orders which will likely be boosted by government incentives. Teva Pharmaceutical has grown into a generic drug giant, even as it also develops new branded drugs. Petrobras is a global oil giant operating in a huge and growing nation, and new Brazilian energy regulations will be sending more business its way.
Target-date funds have many good reasons to hold foreign stocks. However you go about it, you'd do well to imitate their example.