Investing in only U.S. can stifle your returns

Lynn O'Shaughnessy
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Posted: Jul 11, 2006 12:01 AM
Investing in only U.S. can stifle your returns

It wouldn't be a stretch to say that most of the planet has gone gaga over the World Cup, which has brought together 32 of the globe's best soccer teams to compete in a thrilling blur of sweat-soaked matches.

The Brazilian government temporarily changed the country's banking hours so people could watch the games and still deposit their paychecks. In Mexico, tens of thousands of fans have jammed city squares to watch games on jumbo televisions. In Bangladesh, students at one university threatened to riot if the administration didn't delay final exams until the World Cup ended. And the Bangladesh team isn't even in the tournament.

But in the United States, the monthlong athletic drama is as stimulating as two Dramamine tablets and a glass of water. When my husband and a friend tried to catch the opening lunchtime match at a sports bar, the TVs were tuned to golf and tennis. When the manager was asked why the World Cup game wasn't on, he replied, "What's the World Cup?" A televised bass fishing tourney would have trumped airing the planet's greatest sporting event.

Perhaps Americans have dismissed soccer because we aren't good at the sport. After all, in many other countries, children know how to dribble the ball at an age when our kids are developing a taste for Happy Meals. Or maybe it's because we only like to play homegrown sports. Why should we learn to appreciate soccer's finesse moves when we can watch 400-pound linebackers crack each other's skulls and then critique the beer commercials?

This sort of parochialism might explain why many Americans are just as reluctant to invest overseas. Why venture abroad when we can invest in Microsoft, Coca-Cola, Nike and countless other homegrown success stories? But clinging to this sort of myopia can ultimately hurt your financial bottom line.

There are two excellent reasons why you should add a dash of international picante to your portfolios. By doing so, you can potentially enhance your returns, while at the same time reduce the sort of harrowing, unpredictable market volatility that too often triggers investor stampedes into bank lobbies for the safety of CDs.

If you stick with a buy-America investing approach, you're betting all your chips on one roulette number. And often, you won't fare as well as you might expect. To illustrate, here's an example from the Schwab Center for Investment Research: From 1970 to 2005, the U.S. market failed to rank as the top performing developed market for even one year.

This shouldn't be surprising, because 49 other countries have stock markets. More than 37,000 companies are listed globally, compared with about 5,000 corporations listed on U.S. exchanges. Many of the world's alpha dogs are also living elsewhere. The world's largest communications corporation is Nippon T&T in Japan, and in the financial sector, Allianz of Germany is the top banana. In the utility universe, none of the top seven players is located here.

"By investing only in the U.S., you are leaving out essentially half of the world's market value," observes Michael Iachini, a senior research analyst at the Schwab center.

Investing overseas can also help temper your portfolio's mercurial tendencies. What's happened in recent times provides a decent example: During the past three years, the Standard & Poor's 500 Index, which is the benchmark for the nation's blue-chip corporations, has returned 10.12 percent In contrast, international funds have enjoyed annual returns of 21.6 percent, according to Lipper, a Reuters company. Meanwhile, emerging market funds have clobbered everyone by generating returns of 30.3 percent since June 2003.

During other periods, domestic investments will make the honor roll while stocks in far-off places will lag behind. Schwab research, which is backed up by many similar studies, suggests that a portfolio that contains 75 percent domestic stocks and 25 percent international stocks will be significantly less volatile than one that sticks with American companies.

Investing overseas admittedly might seem reckless once you venture past the international behemoths that appear as American as tollhouse cookies (Nestle of Switzerland owns that recipe). It's the obscure companies in countries that trip people up in geography tests that can be scary. Emerging market countries range from pipsqueaks like Sri Lanka and Malaysia to Goliaths like India and China. Many emerging market countries are also in Eastern Europe, as well as Latin America.

What you don't want to do is overdose on emerging markets. If you're an aggressive investor, it's best to devote no more than 5 percent of your equity exposure to these cherry bombs. For those less adventurous, you may want to drop the exposure to 2 percent. As for blue-chip exposure, Schwab recommends in its model portfolios that investors devote 25 percent of their stock holdings to international investments.