I'll cut right to the chase: International stocks will do wonders for your portfolio.

If you're anything like me -- a U.S.-based retail investor looking for stocks to help build a comfortable retirement nest egg -- you need to look abroad for stock investments.

Perhaps you already have ...
It's not because you need them for diversification. My colleague Todd Wenning showed that the correlation between U.S. and foreign stocks has become quite close. No, you need them for the incredible growth potential they pack -- growth that, in some cases, you won't find anywhere here in the United States.

Consider these incredible performers in 2007:

Country

Index

2007 Return

China

Shanghai Stock Exchange Composite

96.7%

India

Bombay Stock Exchange

47.2%

Brazil

Bovespa

43.7%

Hong Kong

Hang Seng Index

39.3%

South Korea

Seoul Composite

32.3%

 

For comparison, the Dow came in 11th at 6.4% growth and the S&P 500 came in 13th with a 3.5% return.

The one-year performance of some individual equities was also jaw-dropping:

Stock

Country

2007 Return

China Finance Online (NASDAQ:JRJC)

China

392.1%

Trina Solar (NYSE:TSL)

China

184.7%

Excel Maritime (NYSE:EXM)

Bermuda

175.1%

Vimpel-Communications (NYSE:VIP)

Russia

172.4%

China Natural Resources (NASDAQ:CHNR)

Hong Kong

135.0%

Source: CapitalIQ, a division of Standard & Poor's

There are many pearls to uncover

If you'd listened to the media up through the beginning of 2008, you may have had the impression that China was the only hot economy. While China did crowd the list of top-performing "world stocks" in 2007, you could have beaten the Shanghai exchange with any one of 27 non-Chinese international stocks, including Brazilian steel producer Companhia Siderurgica Nacional (NYSE:SID), up 144% for the year, or banana king Fresh Del Monte Produce (NYSE:FDP), which returned 125% and hails from the Cayman Islands.

Where do we go now?
Looking at top-performing markets or individual stocks may be interesting, but it doesn't tell us where we should invest now.

Particularly with the news media blaring that world indexes are following the collapse of markets here at home, it may be tempting to think there's nowhere in the world you can turn. Yet while U.S. markets have wiped out all the gains made by the last bull market over the past five years, international bourses in Norway, Denmark, Spain, Greece, and elsewhere have still preserved investors' gains.

Predictably, what was good last year hasn't been good this year. It was a similar story the previous year: Whereas Peru, Venezuela, and Vietnam were the top three performers of 2006, they fell to 14th, 79th, and 22nd place, respectively, toward the end of last year. While China was good to investors, returning more than 95% in 2007 and roughly 130% in 2006, it has been hit especially hard in 2008.

And even though the index has struggled, some individual companies have been brought down to levels so appealing that Motley Fool Global Gains advisor Bill Mann called the recent sell-off in China the investment opportunity of a lifetime.

So the lesson isn't that you should -- or shouldn't -- invest in China ... necessarily. The point is that international stocks will do wonders for your portfolio. Ignoring them is unwise.

The Foolish bottom line
For too long, adding an EAFE (Europe, Asia, Far East) index fund was as close as one could get to going global. These days you can find regional and even country-specific funds.

Investing in international stocks is no different from investing in domestic stocks. Don't try to predict the next hot trend. Instead:

  • Invest in businesses, not stocks
  • Pay close to attention to valuation -- i.e., don't overpay for a story
  • Stay diversified
  • Be patient, and have fun

Just promise me you won't try to predict the next big winner from the headlines. Focus on fundamentals, competitive advantages, growth prospects, and, as ever, valuation.

If it's stock ideas that you need, our Global Gains team recently returned from a research trip to Asia. With a free 30-day trial, you can read all their research from that trip and find out their five favorite companies for right now.

This article was originally published on Aug. 1, 2008. It has been updated.

Fool contributor Rich Duprey does not have a financial interest in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool’s disclosure policy is full of life.