From 2003 through 2007, the MSCI EAFE Index, which measures foreign developed markets, beat the S&P 500 every single calendar year, posting a 166% cumulative gain -- compared to just 83% for the domestic market. The MSCI Emerging Markets Index did nearly as well, returning a cumulative 122%.
But the foreigners' 5-year winning streak may be coming to an end.
There's no place like home
According to Lipper data, international funds topped out last November and have since landed at the bottom of recent fund rankings. Domestic funds have beaten their foreign counterparts in six of the past nine months, and, so far this year, not one of the top-performing funds is an international fund.
Year-to-date, the MSCI EAFE Index is down 19.5% and the MSCI Emerging Markets Index is down 20.6%, compared to -12.3% for the S&P 500.
You see, while the U.S. economy has seen a slowdown, there's plenty of hand-wringing to go around. Economies poised for rocketing growth have seen significant slowdowns of their own. India's GDP growth is slipping from 9.1% to an estimated 7.9%. Similarly, China's growth rate has fallen -- from 11.4% in 2007 to about 10.1% this year -- and inflation is up.
Could this be the dawn of a new day for domestic stocks?
Although foreign stocks are unlikely to maintain the torrid pace they kept up through 2007, long-term growth prospects overseas are still excellent. And given the number of domestic fund managers who have been selectively adding international stocks to their holdings, I'd say I'm not alone in that view.
Dodge & Cox Stock (DODGX) has loaded up on foreign drug makers like Novartis
And these funds are far from alone. Third Avenue Value's (TAVFX) Marty Whitman has more than half of his fund's assets in foreign companies, including Brookfield Asset Management
Do these domestic money managers know something we don't? If your portfolio is a bit light on foreign exposure, the latest drop in these markets offers the perfect opportunity to snap up some attractive big-name companies.
The Foolish bottom line
Investing in foreign stocks can diversify your portfolio by giving you access to markets that aren't perfectly aligned with the U.S. market -- and thus diversify your downside risk.
So don't let the recent downdraft in foreign markets fool you -- there are still some terrific opportunities here, if you're willing to think, and invest, for the long-run.
Of course, investing in foreign companies requires the same due diligence that investing in domestic companies does: finding companies with strong management, solid financials, and good prospects at a good price. If researching foreign financials sounds daunting, you can simply stock up on a mutual fund or two that invest in foreign markets -- and a subscription to the Fool's Champion Funds investment service can help you separate the winners from the losers.
We recommend the top funds in the business -- including a recently reopened foreign fund that focuses exclusively on a geographic region that is slated to produce some of the greatest global gains in the next decade. You can learn the name of this fund, and all of our other fund picks, with a free 30-day trial today.
Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Third Avenue Value Fund is a Motley Fool Champion Funds recommendation. POSCO and GlaxoSmithKline are Income Investor choices. Brookfield is a Global Gains pick. Click here to find out more about the Fool's disclosure policy.