Profiting From the Global Boom

It's not too late for the long-term investor to look overseas.

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By SHARE

If only you'd listened.

Two years ago, Wharton finance professor and investing sage Jeremy Siegel raised eyebrows when he suggested that American investors keep 40 percent of their stock holdings in foreign shares—more than double what the average investor owned at the time.

If you had followed his advice and traded in, say, an index fund tracking the S&P 500 for one that follows the global markets (like Vanguard's Total International Stock Index Fund), you'd have more than doubled your gains. If you had stuck your neck out a bit further and bought into, say, an index fund that tracks emerging markets (like Vanguard's Emerging Markets Index), you'd have trounced the S&P fourfold—and doubled your money.

Still, even if you're taking the slow boat to China, it's not too late to hit the water. Part of the reason is the continuing decline of the U.S. dollar, which makes stocks denominated in foreign currencies more valuable regardless of how they perform. With the dollar seeming to hit new lows against the euro and yen almost daily—and further declines predicted, especially if the U.S. economy slips into recession—you might think of an investment in foreign stocks as coming along with a built-in currency hedge, at least for now.

But there are even more important reasons and smart ways to invest overseas for the long haul. Here are six of them:

• It's the global economy, stupid. Back in 1998, Federal Reserve Chairman Alan Greenspan gave a now famous speech in which he warned that it was "just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress." The "stress" to which Greenspan was referring was the ongoing fallout from the 1997 Asian financial crisis.

Now, a decade later, the situation seems more the opposite. It's the American economy that's under considerable stress—thanks to the bursting housing bubble and credit crunch—amid a booming, prosperous global economy. The International Monetary Fund is forecasting the world economy to expand at a red-hot 4.8 percent this year and next, as the Chinese and Indian economies surge. U.S. Treasury Secretary Henry Paulson calls it "far and away the strongest global economy I've seen in my business lifetime."

Hyperbole? More like understatement. Paulson's old firm, Goldman Sachs, says 2003 through 2008 should prove to be "one of the most powerful periods of economic growth globally since accurate data [have] been collectible for much of the world."

The major reason for the boom, of course, is the global expansion of capitalism and trade that followed the end of the Cold War. Suddenly, a tremendous amount of underused human potential and productivity—and buying power—began to emerge. "I believe the fall of communism and the reintegration of billions of people in the global economy is the biggest economic event of my life," says Brent Lynn, portfolio manager of the Janus Overseas Fund.

But the global boom isn't just about emerging markets. The mainstream economies of Europe and Japan are strong again, and for the first time, the total value of the European stock markets recently surpassed that of U.S. markets.

• Americans underinvest overseas. The reason, say economists, is the same fear of the unknown that has long kept two thirds of Americans from traveling abroad. Its roots are largely irrational. Hostile foreign governments, for instance, might seize the assets of private companies, as Venezuela did recently—yet the companies most affected were based in the United States, not other countries. U.S. investors also tend to feel that foreign accounting and legal standards are below those in the United States—in spite of the American-produced Enron and WorldCom debacles. Or they worry that financial information about foreign companies is simply too hard to come by, even though Reuters, the Financial Times, and others have it covered.

• Foreign investing is a smart way to diversify. With such a large portion of the world's public companies now overseas, leaving them out of your portfolio is "like saying, 'I'm only going to invest in companies with names that start with A through F,'" says Wharton's Siegel. Even emerging markets, he notes, boast large, well-run firms like Petro-China—Asia's most profitable company—and South Korea's Samsung Electronics.