I'm going to lay out all of my cards on the table. Just so I don't get called out on it later, I am not a flag-waving homer who refuses to get my portfolio's passport stamped. I do own shares in exactly one foreign company -- Baidu.com (NASDAQ:BIDU) -- and one of the only two mutual funds that I own specializes in snapping up stakes in small foreign companies.
And I was also the same person who urged readers to go global in 2006, pointing out that the best three mutual funds last year were all dedicated to unearthing winning stocks on foreign soil. So let me start with that list and pivot in a slightly different direction.
| 2005 return | |
|---|---|
| ProFunds: Ultra Japan | +91% |
| ING: Russia | +71 |
| Fidelity Advisors: Korea | +69% |
Impressive, right? However, you'll also find a few global laggards scraping the bottom of the barrel most years. Even if you knew that international investing was the right call for your portfolio last year, the odds are pretty slim that you still would have been able to nail the Japan, Russia, and Korea trifecta.
More importantly, there are thousands of mutual funds out there. According to Investopedia, there are now more funds than there are domestic stocks on the major exchanges to choose from. If you were lucky enough to pick the three best funds, your picks would have averaged a 77% return. If you happened to buy the three best stocks, your return would have trounced those three funds several times over.
Sure, Tim may counter that it's not fair to compare a basket of stocks with the performance of a single entity, but when the pools are equally deep in choices, buying individual domestic stocks promises the bigger payday than buying the global funds.
You don't even need to deal with the thousands of public companies as a whole. Tim and I work on the Rule Breakers growth stock newsletter service. Every month, the newsletter picks two promising companies worth buying into. Of the 24 picks in 2005, four of them have gone on to more than double.
In fact, over the last year, even the slowest of the big gainers has doubled the return of the top international fund of 2005.
As an investor, diversifying a little overseas may make sense, but those thinking that they will be taking on greater risks in pursuit of greater returns may as well start tapping those ruby red slippers and saying, "There's no place like home."
Even looking through many of our successful stock-picking newsletter services, you see that many have singled out an international pick or two, but the biggest winners have been the home-grown selections.
Motley Fool Hidden Gems likes Chinese travel specialist Ctrip.com (NASDAQ:CTRP), but its performance can't compare to the 370% return that Tom Gardner scored on a pizza-oven maker from Illinois. David Gardner recently singled out a pair of Chinese Internet companies for Stock Advisor subscribers, but neither one is remotely close to the 465% gain he generated from a New York City comic book company.
Flukes? Not really. I firmly believe that your best investing ideas will come from companies that you know best. It's why I believe that a portfolio that consists of carefully selected companies that are local to you stands a better chance of beating the market than a national -- or even an international -- portfolio. If you want a little global sizzle, you would be surprised at the local companies generating substantial chunks of business elsewhere.
My best-performing recommendation in the Rule Breakers newsletter is Steiner Leisure (NASDAQ:STNR), a shipboard spa operator based in my hometown of Miami. I was familiar with the company. I could see the cruise industry trends developing. I can get excited about some pretty amazing overseas stocks, but I may never know them as well as the public companies around me.
That's the key. I can also point out that an investor is taking on currency and geopolitical risks with an international buy, but it ultimately boils down to knowledge over ignorance. When you want to travel, by all means, smile friendly at every customs and immigration checkpoint along the way. The more exotic the locale, the better the stories you will ultimately tell. When it comes to your portfolio? You definitely want something a little more familiar. You'll sleep better knowing that your holdings won't wake up to hazy jetlag the next morning.
If you insist on exploring the globalization of your portfolio, do check out the International Report that features 14 opportunities that stateside investors can buy into for a little global exposure.
Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.
Longtime Fool contributor Rick Munarriz does like to stamp his passport. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
