Investing theory holds that adding international stocks to a portfolio dampens the odds that a tanking U.S. market will wipe out your fortune. When your domestic stocks go down, those international stocks can still go up.
A 21st-century investor has to wonder whether that's still true. Don't financial markets move in tandem in this global economy? Haven't mammoth multinational companies blurred the line between domestic and international investing? Is the world round, flat, or some kind of wacky polygon?
Enter Karen K. Lewis, a finance professor at the Wharton School of Business, who decided to test the diversification power of international stocks.
She found that U.S. and international stocks do show an increased tendency to move along the same pattern, but that tendency has increased only slightly over the last 20 years, and not as much as your observation of the markets might suggest. At the same time, she found, foreign markets have become less volatile themselves.
Both trends make international investing an attractive way to reduce risk in your portfolio, which Lewis said can be achieved by putting 20% of your money into foreign markets.
That's a smaller proportion than the recommendation made by another Wharton professor, Jeremy Siegel, who suggests investors put as much as 40% of their capital abroad. The point remains the same. Diversifying your portfolio by adding an international flavor reduces your risks by spreading your money among different kinds of investments.
Where can you go to find international opportunities? Lewis' research suggests that you can get the most bang for your buck by buying foreign stocks traded on foreign exchanges. One easy way for the average investor to do that is by finding a top-notch mutual fund that invests in foreign stocks.
For instance, the T. Rowe Price Global Stock Fund has parlayed investments in America Movil
Index funds or exchange-traded funds offer another easy way for American investors to capture the performance of international markets in their own portfolios.
You can buy the world via investments like the Vanguard FTSE All-World ex-US ETF
Whatever route you choose, start looking abroad for opportunities to spread your wealth, lower your risk, and better weather the ups and downs at home.
For more international ideas, find out:
At our Motley Fool Champion Funds newsletter, you'll find plenty of strong international funds. To find out which funds we're recommending, take a look free with a 30-day trial.
Fool contributor Mary Dalrymple doesn't own shares of the companies and funds mentioned in this article, and she welcomes your feedback. Petrobras is an Income Investor recommendation. The Motley Fool has a disclosure policy.