Foreign stocks tops in 2005

Did you know that foreign companies include 7 of the world’s 10 biggest banks, 6 of the 10 largest oil and gas companies and 7 of the top 9 automobile manufacturers?

If your investment portfolio doesn’t contain any foreign investments, you should consider adding some. In 2005 the top returns were provided by four categories of international stocks when compared to various classes of US stocks, REITs and fixed income, according to statistics provided by Dimensional Fund Advisors. Although it is never a good idea to chase a hot investment category, many investors unjustly ignore international stocks and bonds.

At Mentor Capital we generally recommend some non-US investments for all but the most ultra-conservative clients. Typical allocations will range from 5 to 25% of the total portfolio, depending on the client’s risk tolerance and time-frame.

One major benefit is portfolio diversification. By having a variety of investments that do not always move in lock-step, fluctuations tend to smooth out. While we live in an increasingly interconnected world, foreign countries’ economies and their companies often move in different cycles than those of the U.S.

Tapping into the growth potential of so-called emerging market countries is another draw. Countries such as India, China, South Korea, Brazil and even South Africa are benefiting from export-based economies and reduced government controls and are outpacing the stodgier old economies.

Before jumping in, however, beware of the risks, which include:

• Currency fluctuations
• Less regulated securities markets
• Higher costs
• Lower liquidity

Most of these risks can be mitigated by investing in mutual funds or exchange-traded funds that invest in a large number of companies and countries. Mentor generally does not recommend the use of funds that invest in only one country or region.

You can also get some foreign exposure, although diluted, by investing in the stocks of US companies that have a large export business or own foreign subsidiaries. There are even mutual funds that focus on these types of stocks.