With one of the most diverse economies on the planet, the United States drives global growth and has, for the most part, the best framework for shareholder protection. That’s why investors have always avoided investing in foreign stocks, because there simply wasn’t a need to take the extra risk. Besides that, there’s plenty of opportunity to get international exposure if you own stocks like ExxonMobil (NYSE: XOM) and Yum! Brands (NYSE: YUM).
The fact is, you don’t need to invest abroad but, that being said, it’s also recommended that you own at least one stock from an international company. Many may argue that investing in foreign companies is risky but the fact is that there is just as much risk investing in an American company as there is in a foreign company, and possibly more reward depending on the company itself.
For anyone that says investing in a foreign company is more risky, think about this; is it really riskier to invest in BHP Billiton (NYSE:BHP) that is to invest in FuelCell Energy (NASDAQ: FCEL), just because the first calls Melbourne, Australia home and the second is based in Connecticut? In fact, BHP has been generating billions in free cash flow while FuelCell, since 1998, hasn’t generated any.
If you look at them as a group, there is no more risk in investing in international stocks than investing in US stocks. Just like US companies offer substantial diversity, foreign companies offer it as well including companies like China Life Insurance (NYSE:LFC) and Vodafone (NYSE: VOD), both of which have seen massive cash flow, and VimpelCom (NYSE: VIP) which is surging at the moment.
In some ways, foreign stocks might actually be less risky than US stocks. As nearly every major currency in the world has gained value against the dollar, those investors who have invested heavily internationally have seen excellent benefits from this diversification. Anyone who’s got investments in pounds, rupees, dinars and other denominations is earning more than those who have invested in US dollars.
One reason that some people are looking even harder at foreign stocks is simply because so many money managers are telling them they shouldn’t. When you think about it, the fact that all of the foreign markets together exceed the total size of all US stocks, does it really make sense that allocating 25% of your portfolio to foreign stocks should be considered aggressive?
In many investors’ opinions there is a true lack of investment allocation in foreign companies, especially considering that there is a much more diverse volume of industries available internationally.
So the question of whether or not investing in international stocks is risky is pretty much a moot point. Yes it’s risky, but investing in US stocks is just as risky. From Finland to Taiwan, India, Brazil, Canada and China, there are plenty of intriguing stock bargains around the world that definitely are worth investigating.