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Imagine getting into Wal-Mart back in the early 1970s when it was just a small chain of discount stores in the South. Or, imagine if you could invest in Intel at the dawn of the computer revolution back in the 1980s and 1990s. Similar growth stories are available today in overseas markets. Unfortunately, however, most domestic investors are missing out on these opportunities. You might ask, "Why bother investing overseas?" After all, the U.S. equity markets are the largest and most liquid in the world. History has shown that the U.S. markets are one of the safest places to put your hard-earned dollars to work. After all, many U.S. firms are world leaders in their respective industries. In addition, domestic firms benefit from having access to a stable government, an advanced national infrastructure (quality roads, phone lines, power sources, etc...), reasonable taxes, and the world's most educated and productive workforce. And despite the recent series of high-profile fraud debacles we've seen in recent years, U.S. accounting standards and practices are still much more reliable than those in other countries. (Just think of all the corporate fraud that goes undetected in markets where regulatory bodies are poorly organized, corrupt, or even nonexistent altogether.) The fact is that these are all valid points. As such, we're not suggesting that you should invest your entire portfolio abroad. However, a modest amount of international diversification makes sense for most investors. International investing offers two key advantages: A shot at higher average returns, plus diversification to reduce overall portfolio risks. The World is Your Oyster Although those returns are well above historical averages for the U.S. markets, as you can see in our chart, that performance still pales in comparison to many foreign markets. For example, the MSCI Emerging Markets Index (EEM) -- which represents a broad basket of stocks from countries in Latin America, Eastern Europe and Asia -- is up about +100% over the past two years, a return about 3X that of the S&P 500 and more than double the Nasdaq's gain. And it's not just the riskier emerging markets that are performing well -- the European EMU iShares (EZU), which represent a basket of companies across Europe, are up a whopping +70% in the past two years.
But let's take a longer-term perspective. While individual foreign markets can see volatility from year to year, studies have shown that these markets offer significant return advantages in the long run when taken as part of a diversified portfolio. A study by Vanguard covering the period from 1973 to 2003 shows that European stocks actually offered about a 1% annualized advantage over U.S. stocks -- returns of approximately +12.5% annually against just +11.5% for the U.S. Meanwhile, emerging markets did even better, offering returns close to +15% annualized over the same period. Although 1% to 2% annualized gains might seem like a trivial advantage, that's certainly not the case when looked at over a long time period. For example, $100,000 invested for 30 years at +11.5% would grow to about $2,610,000 -- a very respectable sum. However, if you were able to invest that same $100,000 at +12.5% per year, then you'd end up with over $3,400,000 at the end of 30 years -- an improvement of almost a million dollars. Overseas Markets Offer
Superior Growth Potential However, the U.S. is now a developed market. Although that doesn't mean economic growth will disappear, it does mean that the nation is unlikely to see growth far above 2% to 4% annually. When it comes to sheer size, the United States is far and away the world's largest economy with an annual GDP in excess of $10.8 trillion. That's more than double the size of the world's second-largest economy, Japan, which weighs in at about $4.3 trillion. Although this enormous size and dominance has created some incredible opportunities for investors, it also gives us reason for caution. As the old saying goes, "Trees grow upwards but never reach the heavens." With this in mind, the U.S. economy, just by virtue of its enormous size, is unlikely to grow at an above-average clip in the coming decades. After all, the bigger a company or nation gets, the harder it becomes for it to post stellar growth. Consider that if the U.S. economy were to grow by +10%, then that would mean adding nearly $1.1 trillion to GDP. To give you some perspective on what that means, consider that $1.1 trillion is far more than the entire value of Spain's economy at $836 billion or that of Canada at around $834 billion. These are also staggeringly large figures when you consider that total world GDP is estimated at less that $37 trillion. By contrast, China's economy is worth about $1.4 trillion. For China to grow by +10%, the nation would need to add just $140 billion to its annual GDP. To put that number in perspective, America's largest company, ExxonMobil, weighs in at a little over $400 billion in market value. Bottom line: The U.S. economy, while still the largest in the world, will not be able to match the growth of smaller, rapidly modernizing economies like India and China over the next few decades. In fact, China is already seeing double-digit expansion in GDP, and that growth is likely to continue for some time to come. When it comes to China and other emerging markets, faster GDP growth will power the type of earnings and revenues growth unseen in Corporate America for decades. Diversification In addition, since many foreign firms are involved in industries and geographic markets where U.S. multinationals don't have a presence, investing in such companies can help you profit from new opportunities in these markets. Simply put, foreign stocks give you the ability to diversify your portfolio on more of a global scale.
When the U.S. markets are offering just lackluster performance, gains from foreign stocks can help boost your portfolio returns. And, when times are good globally, emerging markets offer opportunities to really juice up overall returns. A study conducted by Merrill Lynch for the period from 1973 to 2003 shows that a basket of 20% foreign stocks and 80% domestic stocks returned about +12.7% annualized. Meanwhile, a portfolio of only U.S. stocks nearly matched that return at +12.5% annualized. The big difference: the global portfolio showed less volatility and lower risk. Buying Overseas These unique stocks -- known as American Depository Receipts (ADRs) -- are issued by U.S. banks. Without going into too much detail, ADRs basically represent an interest in foreign shares that are held in custody overseas, but they trade here in the U.S. For all intents and purposes, they are identical to purchasing shares in foreign markets, but are much more convenient (and cost effective) for domestic investors. In the analysis below my staff and I will examine two of our favorite foreign companies, both of which trade as ADRs right here in the U.S. ------------------------------ Company #1 -- One of China's
Leading Oil & Gas Firms Thanks to its dominant position in this growing market, Company #1 is poised to deliver stable double-digit growth in the coming years. Meanwhile, with a P/E of less than 9 and a dividend yield of 5.5%, the stock looks like an incredible bargain at current levels. To find out the name of Company #1 and learn more about why it should make a great investment in the coming years, please visit one of the links below. Company #2 -- One of The
World's Largest Generic Drugmakers Thanks to its status as one of the world's largest generic drugmakers, Company #2 is poised to benefit from exploding growth in demand for generic drugs throughout the world. To find out the name of Company #2 and learn more about why it should make a great investment in the coming years, please visit one of the links below. Important: To view the remainder of this article, in which StreetAuthority.com founder Paul Tracy and his staff provide company names and in-depth profiles for both Company #1 and Company #2, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue...
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