You Had a Great Year

Editor's note: An earlier version of this article incorrectly stated that Alltel was down in 2006, but that did not factor in the company's Windstream spin-off. We regret the error.

Do you think you had a great investing year? In fact, you probably did. The Dow set new records, corporate earnings were up, and the S&P 500 made double-digit gains.

But heck, if you were truly happy with your gains this year, then you should probably just go ahead and buy an index fund. Because you could have done a lot better. How much? Take a look at this table.

In fact, the U.S. stock markets were some of the worst places for American investors to have their money in 2006. So while you're sitting around applauding your 13% gains this year, investors in Sweden and Spain are laughing at you. That's right, even the Swedes are laughing.

It's not entirely your fault
Of course, one of the reasons American returns look paltry compared with the rest of the world this year is the weakening dollar. And there's not much American investors can do about that other than learn to live with it -- or perhaps write a nasty email to Congress.

The British pound and the euro, for example, were so strong relative to the U.S. dollar this past year that many of their markets' returns were doubled when converted to dollars.

More specifically, while major American telecoms Sprint Nextel (NYSE:S) and Qualcomm (NASDAQ:QCOM) were under water this year, European counterparts Vodafone and Nokia (NYSE:NOK) were up 15% and 1% in their local currencies. But that doesn't tell the whole tale. Those stocks jumped 33% and 14% when denominated in U.S. dollars.

Trying to beat the market is hard enough. But trying to beat it when you have the weakening dollar playing the part of the monkey on your back is exponentially harder.

Thanks, Congress. (You working on that email yet?)

Fortunately, all is not lost
And while it can be difficult for American investors to pick up European shares such as Vallourec SA and Nicox SA on the pink sheets, the times may be changing. Both of those issues trade on the Euronext exchange, which recently agreed to be acquired by NYSE Group (NYSE:NYX). And with Nasdaq (NASDAQ:NDAQ) battling for the London Stock Exchange, more European stocks are likely to become available to U.S. investors in the near future.

That means that now you can take advantage of the weak dollar to make more money in the stock market. How? Simply by investing in great companies that do business in other currencies.

Luxembourg-based steel pipe producer Tenaris (NYSE:TS), for example, generated roughly 25% of its revenues from North America, 23% from Europe, 27% from South America, and 25% from other parts of the globe. Investing in Tenaris alone would have diversified your funds over many currencies and helped your returns this past year, as the stock more than doubled for U.S. investors in 2006.

This won't always work out according to plan; it's hard to gauge the future of exchange rates, and you can just as easily diminish your returns as you can improve them. Nevertheless, by spreading your investment dollars around to different countries, you've at least hedged your bets. In other words, you'll prevent the weak dollar from making you a Swedish laughingstock going forward.

And that's a good thing.

The Foolish bottom line
It's important to be invested around the globe so you can always profit from the world's best markets. And while doing so comes with rewards, it also comes with it's own set of challenges.

If you'd like some help getting started tracking foreign investments, consider a free 30-day trial to our international investing service, Global Gains. The service will not only provide you with two of our best international stock ideas each month, but it will also help you understand how the global markets can help you accelerate your portfolio's growth.

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Todd Wenning does not own shares of companies mentioned in this article. Vodafone is an Inside Value choice. NYSE Group is a Rule Breakers selection. The Fool has a disclosure policy.