What stocks did your grandfather and father follow? The names are most likely a list of great U.S. institutions like Procter & Gamble
During their investing years, there wasn't much incentive to invest abroad. In 1950, for instance, the U.S. economy accounted for 39.8% of the world's GDP. There was plenty of money to be made and a lot of growth to be had in postwar America. Moreover, without the Internet spreading information across the globe in mere seconds, American investors in international companies could also find themselves at a real informational disadvantage.
The times they are a changin'
Since 1950, the United States has seen its share of the world's GDP slowly erode, while the post-WWII economies of Japan and Germany regain prominence in world markets. More recently, emerging markets like China and India have been rapidly catching up with the developed world. In fact, a 2006 survey by The Economist forecasted that by 2040, the top five economies in the world will be China, the United States, India, Japan, and Mexico (in that order). The same report noted that in 2005, emerging market economies for the first time "accounted for more than half of the world GDP (measured at purchasing-power parity). ... This means that the rich companies no longer dominate the global economy."
With this economic growth overseas came the rise of the American Depositary Receipt (ADR). In the 1960s, for example, Schlumberger
Thar's
gold in them thar hills
And there's good reason for all of this growth -- the rewards of holding international companies in your portfolio can be enormous. Take the Vanguard Total International Stock Index, for example -- a broad and boring index that tracks the broad international market. It's returned 14.3% per year over that past five years, besting our domestic S&P 500 by more than seven percentage points. And then there's the slightly more exciting the Vanguard Emerging Markets Stock Index. It's returned 27.3% returns over the past five years, thumping the S&P by more than 20 percentage points.
You can get your international exposure via an index, but you can also do better by picking individual international stocks.
This isn't to say that international investing isn't complex -- it is. On top of the typical risk associated with domestic stocks, investors in foreign equities must also consider political and currency risks. As we've seen with the recent situations in the Middle East, North Korea, and Thailand, international stocks -- and specifically, emerging market investing -- can get sunk by events entirely outside of their control. On the investor side, pick a company that does business in the wrong currency, and your investment could lose value even if the company executes its business plan flawlessly.
All of this is to say: When buying international stocks, there are added variables to consider in your value equations.
Heavy lifting
Despite the added risks of investing abroad, today's investors must realize that America no longer has a monopoly on growth. A balanced and successful portfolio needs to include some exposure to the international markets.
For help doing just that, consider joining Fool senior analyst Bill Mann and his team at the brand-new Motley Fool Global Gains international investing service. Their goal is to help investors find quality international companies trading at bargain prices. Bill's first two picks are now available, so if you're interested in seeing what they are and learning how international investing can benefit your portfolio, follow this link for a 30-day free full-access trial to Global Gains.
Todd Wenning does not own shares in any company mentioned in this article. Coca-Cola is a Motley Fool Inside Value choice. Unilever is an Income Investor pick. The Fool's disclosure policy is too legit to quit.
