If you haven't yet added foreign stocks to your portfolio, you've missed some significant outperformance. Even as U.S. stocks have recovered during the current rally, average annual returns on the foreign-market MSCI EAFE index are still more than four percentage points ahead of the S&P 500 over the past five years.
If, like many investors, you've hesitated to jump in because of concerns about directly owning foreign stocks, we totally understand. But there are ways to avoid those challenges, yet still profit handsomely from the opportunities.
Funds ... and more funds
For starters, you could buy a mutual fund that specializes in international investing. Actively managed mutual funds do have some drawbacks, but some offer consistently strong performance at a fair price.
One option is Dodge & Cox International Stock. This big-but-nimble no-load fund focuses on large-cap value opportunities, including heavyweights such as Schlumberger
Indexing with ETFs
Exchange-traded funds -- essentially, index funds whose shares are traded on a stock exchange -- offer a very simple way to add international exposure to your portfolio, with less hassle than a traditional mutual fund. There are hundreds of ETFs, with more being launched every week, but Blackrock's acquisition of the iShares line of ETFs gives it a strong position in the global ETF arena.
For a retirement investor looking to diversify with a minimum of fuss, ETFs that track broad-based global indexes, such as the iShares MSCI EAFE Index Fund (EFA) or the iShares MSCI Emerging Markets Index Fund (EEM), are good choices. The first focuses on investments in developed countries, such as HSBC
Get rolling now
If you have a stock portfolio, and you're planning to hold it for more than a few years, you've got to have some international exposure. Half of the world's public companies reside outside the U.S., and they include some of the world's best chances for growth. The best mutual funds and ETFs make acquiring this exposure painless.
If you don't have any global exposure right now, buying the funds listed above is a great no-fuss way to get rolling immediately.
One more thing
Here's one last idea to ponder. Mutual funds and ETFs are quick, easy, and effective ways to get in on the global stock market. But as you get more comfortable and familiar with international investing, you'll want to consider the potentially higher returns that choosing individual stocks for your portfolio can bring.
Once you become more familiar with the currency and political risks facing countries around the world, as well as the global trends that spell opportunity for investors, you'll feel more confident about choosing companies with the greatest potential. The odds are good that some tiny companies in emerging economies will become tomorrow's megacaps.
But it's better to get started in the shallow end than never to jump in the pool. Adding global exposure to your portfolio is essential to making sure you'll profit from innovations across the world as well as right here at home.
For more on international investing:
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This article, written by John Rosevear, was originally published July 19, 2007. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. The Fool owns shares of Dodge & Cox International Stock, which is a Champion Funds recommendation. Nokia is a Motley Fool Inside Value recommendation. Petroleo Brasileiro is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy has a well-stamped passport.