U.S. stocks have returned 6.47 percent to investors so far this year. But the rest of the world has doubled that performance, chalking up 13.4 percent in total returns, as measured by the Standard & Poor's/Citigroup market indexes.
So yes, you should have a piece of your portfolio in foreign stocks. Perhaps even a large piece.
The United States accounts for less than half of the global stock marketplace, yet very few American investors have more than 10 percent of their portfolios in foreign stocks, if they even have that.
Foreign stocks aren't just good to own because some overseas markets are going gangbusters (European stocks, up 22 percent this year, Philippines shares up 30 percent, etc.). They'll also balance out a portfolio that might otherwise be too U.S.-centric.
But there are risks to investing abroad.
You can give up your gains to currency fluctuations if you buy foreign stocks when the U.S. dollar is weak and sell them when it is strong. You can invest in companies based in countries with weak accounting and economic controls, and lose gains to bad bookkeeping. Or you can invest in companies in countries where government controls are so strong that they aren't really free economies.
To avoid those risks, many U.S. investors approach foreign markets through broadly based mutual funds. That can make a lot of sense, but it's not enough to make you truly diversified.
To get all of the gains the world markets have in store, make sure you're also investing in smaller companies and smaller countries. You can do that by buying narrowly targeted foreign small-cap stock funds or even more narrowly targeted single-country funds.
But now a new book by a veteran Wall Streeter is urging individual investors to pick their own foreign stocks. In Finding the Hot Spots: 10 Strategies for Global Investing, former research analyst David Riedel argues that information now available on the Web makes stock picking as easy overseas as it is in the United States.
Many major foreign stocks are listed on U.S. stock exchanges and pay dividends in dollars; others are listed through proxy American Depository Receipts that feel, act, and trade just like shares of stock.
So how do you find your foreign favorites? Here are some techniques that Riedel offers.
- Diversify by region, country and company, but don't buy some of everything; if you do that, you might as well just chose a broad index fund and be done with it. Instead, concentrate on a handful of themes, like Turkey joining the
European Union, the strong growth of African mining industries or the recovery of Japanese banks. Then pick a handful of companies that would benefit from each theme.
- Read between the trend lines. Train yourself to think strategically about how certain companies will benefit from sweeping foreign themes.
China's going gangbusters? That's great, but it doesn't mean you have to load up on risky Chinese companies to cash in. Find out what companies like Volkswagen are selling big in China.
China also is one of the world's major importers of soybeans; Brazil is one of the world's largest exporters. Should you buy Brazilian natural resources stocks? Maybe, says Riedel, who also suggests looking at Brazilian transportation logistics companies.
- Avoid protected industries. Deregulation is a worldwide trend, and companies that look profitable because their government carves out space for them can fall fast when policies change.
- Buy banks. Interest rates rise and interest rates fall, but banks make money either way. They make money from borrowers and from lenders. They make money when companies grow and when companies slow down.
Not every bank will be profitable every day, says Riedel. But around the world, they still offer a good way to bet on a country's growing economy. All business activity is tied to a bank, he says.
Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com.