By now you may have heard a thing or three about the desirability of investing in foreign markets. And there are some compelling reasons being tossed around: It's a good hedge against a falling dollar, it opens you up to a whole new world of exciting growth, and it makes you sound smarter at cocktail parties.

But I don't think we hear enough about the best reason to add foreign stocks to your portfolio.

Lunch is on me
Here it is, in a nutshell: Increasing your exposure to foreign stocks, up to a certain point, both raises your expected returns and lowers your risk. It's what Princeton professor Burton Malkiel calls "the closest thing to a free lunch in our world securities markets." Not buying foreign stocks, says Wharton professor Jeremy Siegel, "is a risky strategy for investors."

What is the optimal amount of foreign exposure? Well, that depends on a lot of factors and assumptions. In his book Stocks for the Long Run, Siegel says that you minimize risk with about 22.5% foreign exposure, while 37.8% optimally balances risk and return. Our Motley Fool Global Gains service found more recent guidelines of anywhere from 35% to 70% from groups like Ibbotson and Citigroup, and even master investors such as Warren Buffett.

But you needn't get bogged down in the fine tuning, especially if you're lacking any foreign exposure right now. Any movement in your allocation from zero percent to a minimum of 20% is a step in the right direction for your long-term financial health.

Monster returns
There's no question you can find big winners among American companies. But let me give you a strong example from my own research of why a U.S.-only strategy is like investing with one hand tied behind your back.

Of all companies valued at $200 million or more when the calendar flipped to the year 2000, some 70 increased at least 10 times in value. About fifty of those are based abroad. Digging a bit more, I found that 70% of the five-baggers also came from abroad. Here's a sampling of some of the more interesting names:




Return Since Jan. 1, 2000

XTO Energy (NYSE: XTO)


Oil and gas


Research In Motion


Communications equipment




Oil and gas


Apple (Nasdaq: AAPL)




Bharat Heavy Electricals


Electrical equipment


Chesapeake Energy (NYSE: CHK)


Oil and gas


PotashCorp (NYSE: POT)




Frontline (NYSE: FRO)


Oil and gas


Teva Pharmaceutical (Nasdaq: TEVA)




Celgene (Nasdaq: CELG)




Data provided by Capital IQ, a division of Standard & Poor's; through Feb. 14, 2010.

Foolish bottom line
After reviewing all the data, Global Gains advisors Tim Hanson and Nathan Parmelee suggest a goal of about 60% foreign exposure. From there, they recommend you diversify your foreign holdings even further -- spreading your money out among emerging and developed markets, as well as into different regions and industries.

Their special report, Build the Perfect Global Portfolio, provides all the details. You can see that report, plus all their specific foreign stock recommendations, by simply taking a free 30-day trial of the service. Here's more information.

Fool analyst Rex Moore is now available in high definition. He doesn't own any companies mentioned here. Chesapeake Energy is a Motley Fool Inside Value pick, Apple is a Stock Advisor recommendation, and Petrobras is an Income Investor pick. The Fool owns shares of Chesapeake Energy and XTO Energy. The Fool has a disclosure policy.