Why You Must Own International Stocks

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By Bill Mann

It wasn't long ago that I opined that American investors didn't need to invest overseas. After all, the United States is the most diverse economy on the planet, the driver of global growth, and the country with -- by and large -- the best shareholder protection framework. You could (and can) get a ton of international exposure by holding U.S.-based companies like McDonald's (NYSE: MCD) and Caterpillar (NYSE: CAT).

I wrote these words. I believe them to be true. So why did I sign on to be the advisor for The Motley Fool's international investing service, Global Gains?

Because my own investing track record would be dramatically poorer had I not made the choice from the beginning of my investing career to comb foreign markets for great investing ideas. No, you don't need to invest overseas. But I firmly believe that everyone should own at least one international stock.

But Bill, isn't foreign investing risky?
After all, that's the message we get from the weathervanes on financial television. One person will say "I am taking my allocation in international up to 30%," and another will say "Wow! That's really aggressive!" The implication is that the more money one allocates outside the United States, the higher the absolute risk level.

What utter rot.

The thought that America Movil (NYSE: AMX) is riskier than Sirius Satellite Radio (Nasdaq: SIRI) just because the former is based in Mexico rather than New York City is absurd. America Movil generates billions in free cash flow each year, while Sirius followed up its $500 million cash-from-operations drain in 2006 with a $300 million cash drain in 2007.

As a group, international stocks are no more risky than U.S. stocks. Foreign companies offer substantial diversity in the same exact way that U.S. companies do, from the massive cash flow-rich Novartis (NYSE: NVS) to the riskier Chinese medical company American Oriental Bioengineering (NYSE: AOB) to the high-technology giant Nokia (NYSE: NOK).

In fact, they may be less risky. Over the past five years, people who invested heavily in overseas companies have seen a powerful benefit from diversification as the U.S. dollar has dropped in value against nearly every major currency. That means earnings denominated in pounds, dinars, rupees, or won are worth more for people who invest in dollars.

The fact that so many money managers pooh-pooh foreign investing as being "riskier" is the exact reason why you should look here. Think about it: The foreign markets in aggregate exceed the size of all U.S. stocks, yet a 25% allocation to foreign stocks is considered "aggressive." Hmmmmm. Sounds to me as though most investors underallocate to foreign companies. I'd be perfectly comfortable putting 100% of my money overseas. If anything, the types of industries available are more diverse than what's available in the United States.

Yes, it is risky -- but probably less than you think
All investing has an element of risk to it. But the U.S. market has underperformed many international markets for the better part of this decade, for the very reason that capital invested in China, India, even Brazil has generated higher returns. I don't expect this condition to reverse itself long-term, and with the recent savaging of markets around the globe, we're seeing some pretty intriguing bargains from Taiwan to Finland to Canada.

Source:
http://www.fool.com/investing/international/2008/02/19/why-you-must-own-international-stocks.aspx

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