Do you have enough international stocks in your portfolio? If not, you may have a chance to cash in on the best opportunity we've seen in years.
Until last year, stock markets in foreign countries went nuts for several years running. From 2004 to 2007, world stock markets, as measured by the MSCI EAFE index, rose at a faster pace even than stocks here at home -- 17% annually, compared to just 9% for the S&P 500.
Fear and greed
With such strong past performance, you'd expect average investors to jump on the international bandwagon. And you'd be right -- they did, as mutual fund flows favored international stocks over domestic for much of that time frame.
Yet, just as the rise of real estate investment trusts (REITs) in the late '90s finally gave way to a long-awaited fall, international stocks have suffered in the bear market we've seen over the past two years. This has caused fundamentally sound companies like Vale
In addition, the U.S. recession has sent waves of fear rippling around the world. But that doesn't mean that the Shanghai index and other international markets won't rebound to new highs -- they've already resumed their upward motion in the recent rally. Like a game of musical chairs, you don't want to be the last one to buy into soaring international stocks before a major correction occurs, but you also don't want to be the last to recognize when it's time to get back in the game.
Is 10% enough?
Traditionally, many financial advisors recommended that investors keep most of their stock investments within the U.S., typically allocating just 10% or so to foreign stocks. Planners argue that lower levels of investing regulation, less transparent financial disclosure, and political and economic instability support a conservative approach to allocating money to foreign markets.
However, just as REITs benefited from planners' increasing willingness to divert some of a client's fixed-income allocation away from bonds, advisors are now taking a second look at the 10% rule for international stocks. As the global economy continues to evolve, national identity among corporations becomes less important every year.
Perhaps the most obvious example is the automotive industry, where Japanese manufacturers like Honda
Given that the U.S. economy makes up only about a quarter of the world's gross economic product, ratcheting up international stock allocations even an additional 5%-10% makes plenty of sense -- but it could also have a huge impact on stock valuations going forward.
It's true that even if you only own American stocks, you still have a wide exposure to the worldwide economy. However, just as diversifying across sectors of the economy is prudent to avoid risks to specific types of companies, diversifying across national borders can give you some protection against an economic downturn that hits a particular country.
International investing advantages
One other objection many investors have is that learning about companies across the world can be more difficult than researching U.S. companies. The nuances and subtle differences in the way people do business around the world require analysts to think outside the box when judging how well a company might be able to perform in the global marketplace.
The Fool started its international investing newsletter, Global Gains, in part to help shed more light on investing opportunities available overseas. But it's not just a stock-picking service. Along with monthly recommendations, you also get informative commentary about particular industries, general economic conditions, and business practices in different regions of the world. Global Gains can give you the comfort you need to expand your investing horizon beyond America's shores.
This article was originally published on July 3, 2007. It has been updated.
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This article has been updated by Dan Caplinger, who does not own shares in any of the companies mentioned in this article. America Movil is a Global Gains pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is good everywhere you want to go.