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 five?

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

You call that a market?
Given our dismal performance this year, you might guess that the U.S. is not on the list ... and you’d be right. In fact, the S&P 500 is down almost 40% over the past year. That's abysmal ... and it’s particularly abysmal when compared with some other global markets.

Without further ado, the top five performers:

Source: Motley Fool Global Gains research.

This list is incredible to me for a couple of reasons. First, it's been such a bad year that there is just one market in the entire world with positive returns. Hopefully, that makes you feel a little better about your own returns. Second, the list of countries here is unexpected. Venezuela? Tunisia?

We can learn a few things from this. First, if you're an American investor, it's absolutely crucial to be invested abroad. The returns of individual markets can offer needed diversification and the opportunity to improve your overall returns even in down years.

Second, the best returns can come from obscure places -- not from the countries we read about every day in the papers.

Finally, there is some risk involved in investing internationally. For example, because of the threat of dictatorship and nationalization, Venezuela probably isn't a place you want to be keeping your money.

Buy what others don'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 don't look. That's why the 10 best domestic stocks of the past 10 years were all small caps.

See, huge numbers of investors and analysts watch large companies and popular markets. Hewlett-Packard (NYSE:HPQ) and Oracle (NASDAQ:ORCL), for example, get coverage from 20 or more analysts. Those popular stocks also each have more than 2,500 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 2,000 investors cover Target (NYSE:TGT) and Merck (NYSE:MRK) in CAPS, there aren’t as many choices when it comes to the five countries mentioned above -- and those choices generally aren’t as well-known. South African company Net 1 UEPS (NASDAQ:UEPS) has just 255 ratings. And Millicom International Cellular (NASDAQ:MICC) -- a European multinational with substantial business in Africa -- has little more than 500.

The Foolish bottom line
That's where your opportunity lies as a Foolish investor. And if you do your homework, you don't necessarily have to assume that much risk 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 Global Gains service free for 30 days. There is no obligation to subscribe.

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

Tim Hanson doesn’t own shares of any company mentioned. Millicom International Cellular is a Global Gains recommendation. Net 1 is a Rule Breakers pick. No Fool is too cool for disclosure.