The 5 Best Places to Invest

If pressed, could you tell me the country that offered the best stock returns over the past year? What about any members of the top 5?

It's harder than you probably think, because they're not the countries you might expect.

You call that a bull market?
Despite recent volatility, the S&P 500 has still returned nearly 12% annually over the past five years. While that's an impressive number on the surface, it's abysmal when compared with the rest of the world's equities.

And over the past year, the S&P has been down, while many foreign markets have been booming. Without further ado, the top performers over the past year:

Source: Motley Fool Global Gains.

This list is incredible to me. Cote d'Ivoire? Tiny Mauritius?

We can learn a few things from this list. First, if you're an American investor, it's absolutely crucial to be invested abroad. The potential returns to be found overseas are too good to pass up. Second, the best returns often come from obscure places -- not from the countries we read about every day in the papers. And finally, there is some risk involved in investing internationally. For example, given its problems with crime and corruption, Nigeria isn't exactly a no-brainer for foreign investors.

Buy what others aren't
But the main lesson here is old hat: To get the best returns, you need to be willing (and able) to look where other investors aren't. That's why the 10 best domestic stocks of the past 10 years were all small caps.

See, large companies and popular markets have huge numbers of investors and analysts watching them. Motorola (NYSE:MOT), Home Depot (NYSE:HD), and Citigroup (NYSE:C), for example, get coverage from 20 or more analysts. Those three popular stocks also have more than 1,800 ratings in our Motley Fool CAPS community-intelligence database.

In other words, they're probably pretty efficiently priced.

You'll get the best returns, however, by finding market inefficiencies. And while another 1,500 investors are covering AT&T (NYSE:T) and FedEx (NYSE:FDX) in CAPS, you can't find a stock from any one of those countries on a major U.S. exchange. You have to go to the grey or pink sheets to find names like Access Bank Nigeria or Bangladesh's Beximco Pharmaceuticals.

The Foolish bottom line
That's where your opportunity lies as a Foolish investor. But as I said, international investing is not without risks -- particularly if you're investing in frontier economies via the grey sheets. But you don't necessarily have to assume that much risk in order to find promising international investments.

If you'd like some help finding worthy international investing ideas that you may never have heard of, click here to try our new Global Gains service free for 30 days. There is no obligation to subscribe.

This article was originally published on Dec. 13, 2006 as "The 10 Best Places to Invest." It has been updated.

Tim Hanson does not own shares of any company mentioned. FedEx is a Motley Fool Stock Advisor recommendation. Home Depot is an Inside Value recommendation. No Fool is too cool for disclosure.