Can International Stocks Boost Your Returns?

With all the talk these days about the weak dollar, our growing deficit and our anemic economy, people are looking to international stock markets for better investment opportunities. But before you get too enthusiastic about these markets, here are a few things to consider.

Growth. Everyone is predicting that international economies will grow faster the the U.S. That may well be true, but it doesn't necessarily mean you'll get better investment results. You may recall that technology companies grew faster than other companies, but the investment returns have been terrible over the last 10 years.

• Why? Because the high growth rate was already baked into the price.
• You need to consider this when you venture into international markets. You aren't the only one who believes they will grow faster, and they will be priced accordingly.

Marketing. Wall Street is always looking for new ways to get their hands on your money. International investing is one of several current investment themes being heavily promoted. That's fine, but you have to keep the marketing in perspective.

• While international stocks may turn out to be good long term holdings, they are still equity investments. This means they're going to be subject to about the same risk profile as U.S. stocks. So get prepared for a wild ride.

History. The U.S. has a good 100 to 120 years of history with capital markets. So we've been around the block a few times. Many international markets are new to the game, and they don't have quite the same perspective as we do.

• Even with our history of booms, busts and fraud, we still get ourselves into trouble. Expect that these emerging economies will go through similar events.

Government. While we may all like to bash our elected representatives these days, we still have the most open and dynamic political system in the world. Don't discount how important that is to economic innovation and growth.

• If our fiscal, monetary or tax policies don't work, then we have a chance to change things every couple of years. And we change them through a democratic, peaceful process.
• We are stable, yet flexible, which is good for capital markets.
• Other countries don't have this history, and sometimes governments change in strange ways. Consider Venezuela and Russia, or how China might deal with a political challenge.
• Both political instability and inflexibiilty are bad for financial markets.

Winners and Losers. There are certainly many great companies that are headquartered overseas, and there are good investment opportunities in international markets. But it won't be any easier to pick winners and losers in international markets than it is in the U.S. market. Expect that sometimes your international holdings will do better than the U.S., and vice versa. Invest because you want to diversify, not because you think you've found better or easier markets.
Bottom line. International investing is one of several things you should be doing to diversify your holdings. But don't expect these markets to work miracles for you.

As with all financial matters, consult your individual financial advisor prior to making any decisions.

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