Advantages to Investing Overseas

By Matt Krantz from Investing Online For Dummies, 8th Edition

Figuring out new market indexes and international stocks is worth the hassle. Adding a bit of foreign market exposure to your portfolio gives you two major advantages:

Turbocharged growth: If you’re invested internationally and the economy sputters in the United States, you still have a chance to enjoy growth overseas. This is especially true with emerging markets stocks. Developing nations like China and Brazil are so early in their maturity that they’re growing much faster than the United States.

Greater growth in emerging markets translates into the potential for greater returns. Emerging markets stocks can deliver huge returns over time. For instance, emerging markets stocks gained 72 percent and 36 percent in 2009 and 2007, respectively, says IFA.com. That blows away large U.S. stocks’ returns of 27 percent and 5 percent in the same years.

Don’t let the rapid economic and recent stock price growth of emerging markets intoxicate you. Emerging market stocks are very risky. Some academics consider emerging markets stocks to be some of the riskiest stocks you can buy. Putting all your money in emerging markets is a bad idea, just as putting your whole portfolio in U.S. stocks isn’t optimum.

Emerging markets can enjoy large returns, but they can swing wildly. For example, in 2008, emerging markets’ lost 49 percent of their value, a horrible hit compared with the already painful 38 percent decline by large U.S. stocks. And they didn’t exactly spring back to life after the financial crisis ended. Emerging markets stocks lost 17% including dividends in 2011, while the S&P 500 returned 2.1%.

Remember to keep your portfolio balanced and stick with your asset allocation plan.
Diversification: It might seem crazy to load up on stocks of companies you’ve never heard of in countries you can barely find on a map. But the irony is that adding foreign stocks actually reduces your portfolio’s risk.

Here’s why: Foreign stocks don’t move in complete lockstep with U.S. stocks. Sometimes when U.S. stocks are falling, foreign stocks don’t fall as much, hold steady, or even rise. You can find out how much foreign exposure is right for you by designing an asset allocation.

Nearly all investors should have at least 10 percent exposure to international and emerging markets stocks. Many investors should have even more.