To achieve superior, above-average returns, a key factor that many investors fail to understand is the need to diversify outside of one’s borders. The reality is there is a world outside of the U.S. and Canada that offers far more growth opportunities than domestic markets. Don’t get caught up in investing in domestic companies as a way to grow and protect local companies. At the end of the day, what we really care about is achieving the highest returns possible, and this is where investing in foreign stocks play a major role.
Simply take a look at some of the emerging markets around the world including Japan, India, South Korea, China, and Latin America. The benchmark Shanghai Composite Index (SCI) just touched another record historical high of 3,596.44 on April 16, 2007, up an astounding 166% from its 52-week low of 1,353.40. Now, compare that to the 17% and 9.52% gain in the Russell 2000 and NASDAQ in 2006.
Now, while there is a need to invest some of your capital in foreign markets, you must also be aware of the added risk of investing in markets that have shown superior growth.
What happens is, if everything else is equal, the risk associated with investing in markets in such emerging areas as Latin America and Asia is much higher than investing in U.S. or Canadian markets.
If you are invested in some of the emerging markets such as Argentina, Brazil, Mexico, or even China, you need to be extra cautious about your investments. The February selloff in China reflected the risk.
Once global fears increase, stocks in emerging markets can accelerate their losses. If you are up on these stocks, you may want to set a price point to exit in order to prevent major losses if the tide turns lower.
So while the added risk from foreign exposure is real, you should not ignore these markets. Allocate some capital to foreign stocks or funds.