Why should you invest in Foreign Stocks

There are several compelling reasons why investors should consider adding foreign stocks to their portfolios. Foreign stocks as a group have outperformed U.S. stocks during the period 2003 through 2006. Moreover, there will always be some equity markets abroad that will outperform U.S. stocks in any particular year. Because economic cycles in different countries move separately from each other, investors can take advantage of the different stock market situations. This is indeed confirmed by the fact that the majority of the stocks traded in the world originate outside the United States. Investing in foreign stocks gives investors the opportunity to diversify their portfolios, which reduces the overall risk and volatility of the portfolio. If stocks in one country decline, there is a good chance that stocks in another country will increase to even out the variability in stock prices.

Investing in foreign stocks provides a hedge against a slump in the U.S. stock market or any other economic woes, such as inflation or rising interest rates. The same factors apply to foreign stock prices as to American stock prices. The earnings and economic health of the company are reflected in the stock price, as well as the economic and political conditions of the country.

Foreign stock markets may not be as efficient as the U.S. markets in pricing their stocks. The U.S. stock markets generally are characterized by relatively fast flows of information on stocks, large amounts of capital, and many traders, which make the pricing of stocks relatively efficient. In smaller foreign markets, there may be more opportunities to exploit pricing inconsistencies because there are fewer traders, smaller amounts of capital chasing stocks, and possibly slower information flows. Hence the potential gains to be had in these markets may be larger than those in the U.S. markets. This is certainly reflected in the growth of foreign stock markets. The U.S. share of the total world’s market capitalization is expected to decline as foreign stock markets become more accessible.

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