For many investors, the notion of taking their stock portfolio across the pond is intimidating at best. Between currency fluctuations, political uncertainty and unfamiliar accounting standards, it's easy to see why.
A growing body of evidence, however, suggests exposure to foreign stocks can deliver some important diversification benefits to an otherwise U.S.-centric portfolio, helping to offset Wall Street volatility and distribute risk over multiple economies.
Consider the Morgan Stanley Capital International, or MSCI, EAFE Index, a stock market index of 21 developed markets including Europe, Australia and the Far East.
Over the past three years, that index has returned roughly 19 percent annually as of August 2007. The EAFE returned nearly 17 percent over the last five years and 5.8 percent over the last 10.
By comparison, the S&P 500 index of large-cap U.S. stocks returned 12 percent over the last three years, nearly 12 percent over the past five years and 6.7 percent over the last decade.
John Thompson, portfolio manager for asset allocation services firm Ibbotson Associates, recommends investors earmark 25 percent to 30 percent of their total equity portfolio to global stocks.
That figure drops to 20 percent or less as investors reach retirement age, he notes.
Tips for going globalPerhaps the easiest way to invest in foreign stocks, says Thompson, is to purchase mutual funds or Exchange Traded Funds, known as ETFs, that mimic the MSCI EAFE.
Target-date funds or life-cycle funds are another option. Such funds invest in a mix of stocks and bonds based on the investor's time horizon, and many automatically include a 20 percent or greater foreign weighting.
"Target funds are very good tools for people who don't want to work closely with their money and want to leave that responsibility to a third party," says Thompson.
There are also, of course, American Depositary Receipts.
ADRs are stocks that trade in the U.S., but represent shares in a foreign corporation.
U.S. banks simply purchase a specified number of shares from the company, bundle them into groups and reissue them to investors.
There's no need to convert currencies since the stock trades in U.S. dollars.