2 Ways to Spice Up Your Stock Returns

After another holiday family gathering, I never cease to be amazed at how no matter how much great food you put in front of everyone, some people always gravitate to exactly the same things, year after year. I can't blame them -- those potatoes are fantastic! -- but it's a shame that so much other great food goes uneaten.

The same thing's true of stock investing. Plenty of smart investors never think to go beyond their comfort zone: large-cap U.S. stocks, the big companies that nearly everyone is familiar with. Yet even though you can invest successfully even if you never go beyond those well-known stocks, there's a world of other investments out there -- and the right mix could spice up your returns and make investing a much more interesting experience.

Think small
As painful as it's been, the bear market has taught investors a valuable lesson. Many investors mistakenly believed that the huge companies that are household names were protected from the full extent of market risk. Yet with the S&P 500 having been down close to 60% from its highs -- and the big failures of Washington Mutual, Bear Stearns, and Lehman Brothers having been almost unthinkable just a couple years ago -- any illusions that anyone had that even the best-known companies were immune from potential disaster have disappeared forever.

But the flip side of that realization is that many smaller companies have proved just as able as their larger brethren to withstand the full brunt of the economic downturn. Moreover, with less infrastructure and more recent experience building their business, small companies can more easily adapt to changing conditions -- which is one reason why their stocks have historically led the financial markets out of recession.

With higher returns over the years, small caps can find a place in any stock portfolio. And although during normal times, there is a bit more risk that small companies will suffer some major catastrophe that wipes out shareholders, those stocks also have much more potential for huge gains -- gains that can help you withstand other losses among your stocks.

Around the world
Many investors similarly neglect international stocks. Yet for every major U.S. company, you can find a similar foreign stock with strong prospects. Consider:

Source: Yahoo! Finance intraday on 5/26/09.

Of course, it's easy to understand why investors stick with U.S. stocks. During the 20th century, the United States built itself into the largest economy in the world, and American companies benefited from the country's overall prosperity. No matter what the future brings, domestic stocks will continue to play a major role in the global economy.

Although it's too early to say whether the best days for the U.S. economy are over, what is clear is that other economies around the world -- most notably China, but also a number of other emerging powers around the globe -- also look attractive right now. And given how small some of those economies are right now, the young companies that are emerging onto the international scene as major players in their industries still have huge potential for growth. The investors who discover them early could reap big profits.

Get spicy
If investing in anything other than big U.S. stocks gives you the shivers, it's worth venturing outward a bit with your investments. You don't need to overdo it at first -- just a few stocks here and there can open your horizon to a brand new investing experience. Once you see what the world beyond domestic megacaps can offer you, though, you'll never want to go back to a boring, bland portfolio again.

For more on spicing up your investments:

• Why this stock's a winner.
• The best stocks to buy in this market.
• 3 value traps to avoid.