Risk

First, let's establish the fact that international securities are riskier than U.S. investments. This is definitely true, especially with the emerging markets. Take Venezuela for example - in May, their market was at 7,000, it dropped to 3,000 by September, and was back up to 4,000 by October. That kind of volatility means risk! Still not convinced? Who would have known just months ago that the Russian economy was going to completely fold? Simply put, foreign markets pose a higher risk.

Diversification

Now let's think about diversification - what's the purpose? The purpose is to curb, control, or reduce risk. Agree?--good. If we want to diversify our portfolio, essentially reduce our risk, why allocate to the much riskier foreign securities?

Diversification = reduced risk
Foreign Securities = increase risk
Foreign Securities Does Not = Diversification

Bad here, Good there

Others defend international investing with the "Bad market here, Good market there" routine. Sorry again folks, it rarely works that way. Maybe it did work long ago before our economy became so globalized, but each country is now dependent on every other.

If Thailand is doing bad, Russia is doing bad. If the U.S. is doing bad, so is Peru. Not only are the less stable countries likely to be doing just as bad as the U.S. economy, but they are more likely to be doing worse than the U.S. economy.

The U.S. economy is the strongest, most stable, and most secure place to invest in the world. That's why the Asians brought all of their money here when their economic turmoil began.

Three Risks

When we invest internationally we are taking three risks. First, that the foreign economy and market of our choice will do well. Second, that the individual stocks or mutual funds we choose in those foreign markets will do well.

If we are lucky enough to get past the first two risk factors, then we have to worry about currency. "Hooray! These international stocks are doing so well!" But what about exchange rates? Currency just throws a whole new variable into the equation.

U.S. Outperforms

By conducting a quick study and randomly picking 15 U.S. stock mutual funds and 15 foreign stock mutual funds, we found that the average 10-year return for the U.S. funds was 17.57%, while the average return for the foreign funds was only 11.93%. Pretty big difference huh?

Over a thirty-year period, that 5.6% difference would mean big Bucks. Had you invested $1,000 10 years ago in the U.S. stock fund, you would have $5,721. Investing that $1,000 in an international stock fund would yield only $3,227. That's a big difference.

To sum it up

1. Foreign stocks are generally riskier than U.S. stocks
2. The purpose of diversification is to reduce risk
3. Over the long run, or the Buck market, U.S. stocks produce a higher return
4. The "Bad market here, Good market there" spiel doesn't work anymore with our global economy
5. In the global economy, foreign countries are likely to be worse off than the U.S.

If you're still dead set on investing abroad, try using a mutual fund. But look at the returns these full-time professional money managers attained, only about 11.93%. Do you think you could do better? If you're a decent stock picker, maybe. But keep in mind that foreign securities are hard to track and monitor; plus foreign markets don't have the regulation and efficiency that we have in the U.S.

[an error occurred while processing this directive]