Here are two sobering statistics concerning the state of the U.S. economy:
- Nine of the 10 largest IPOs of 2006 and 24 of the 25 largest IPOs of 2005 occurred in foreign markets.
- The economies of Argentina, Belarus, Belize, China, the Czech Republic, India, Indonesia, Ireland, Israel, the Philippines, and Russia are all growing faster than that of the United States.
In other words, not only are we no longer the most dynamic economy in the world, we're not the world's financial capital, either. As Alan Murray wrote recently in The Wall Street Journal, "We are witnessing a crucial moment in history -- the movement of U.S. capital markets abroad."
So why, then, are you investing only in the United States?
All is not lost
Apologies if you're already diversified across some foreign markets. It's true that U.S. investment in foreign securities has been rising rapidly of late. In fact, foreign holdings recently accounted for 17% of all U.S. stock ownership.
But that's still too little. What's holding you back from making foreign securities up to 30% of your portfolio?
I'll take a stab at that one
There are lots of reasons individual investors are concerned about investing in foreign equities. First, accounting rules differ from country to country. Next, there's currency risk and the confusing tax treaties. And then there's government corruption, unstable political climates ... the list goes on.
These risks have probably held you back from stocking up on foreign securities.
But consider: If you're not actively investing in foreign stocks, you're shrugging your shoulders at the incredible growth potential that emerging markets offer. You're also making your portfolio riskier -- because your job, savings, and assets are probably parked right here in the good ol' U.S. of A, meaning you're relying almost entirely on the U.S. economy to help you achieve your financial goals. And while the U.S. economy is strong, significant growth is available elsewhere.
Hot markets, hot returns
Look, the world is changing, and there is no turning back. As retired Infosys Technologies chairman N.R. Narayana Murthy observed in a recent Wall Street Journal editorial, globalization is actually "accelerating."
And know that there are incredible profits to be made from these changes. Just consider the history of Infosys. Mr. Murthy founded the company in 1981 with $250 of seed money. Today, Infosys is worth more than $28 billion. If you're keeping score at home, Infosys has returned 104% annually.
Do those opportunities exist today? Sure. But no one with a conscience can promise 104% annual returns. Of course, that doesn't mean you shouldn't be looking.
Get those global gains
If you're already looking to add international exposure to your portfolio, then you're headed in the right direction. There are many ways to achieve this level of diversification. One way is to invest in American companies that derive significant revenue from foreign countries -- a list that would include Procter & Gamble
You could also take a look at a number of low-cost exchange-traded funds. Vanguard Emerging Markets (VWO), for example, returned 30% in 2006 and has an expense ratio that dings you just 0.30%. Among its current top holdings are Infosys, Teva Pharmaceutical
Of course, the downside with funds and conglomerates is that your gains will always be muted. So, if you're ready to start searching for promising stocks in international markets, consider joining Motley Fool Senior Analyst Bill Mann and his team at our brand-new Global Gains international investing service.
Global Gains aims to beat the market with foreign stocks while teaching you how to analyze and invest in other countries. And we depart for China, India, and Taiwan on June 2 in search of new investment opportunities in some of the world's fastest-growing economies. Get all of our updates and analysis live from the field by sending Bill an email at BillTrip@Fool.com.
This article was originally published Oct. 25, 2006. It has been updated.
Tim Hanson does not own shares of any company mentioned, but his wife holds shares of the Vanguard Emerging Markets ETF. Dell is an Inside Value and Stock Advisor recommendation. Sasol is a Global Gains pick. The Fool's disclosure policy guarantees that no stocks were harmed in the making of this article.