Siegel advocates a big stake in foreign equities not because of their potential for heftier annual returns but because they can lower your portfolio's risk. Global stock markets do tend to move together over the short run, as in the sell-off in August and the subsequent bounce back after the Federal Reserve lowered interest rates last month. But "there's no correlation between them over the long run at all," explains Siegel. "So by diversifying globally, you're spreading your bets and reducing your risk."
• It's best to raise your foreign holdings gradually. With the recent run-up in global stock indexes—all at a time when some economic indicators point to a global slowdown—many financial advisers suggest using a classic dollar-cost averaging strategy (buying shares at regular intervals) to build a foreign portfolio over time. "That way, you don't have to worry about getting in at the peak," Siegel says.
The first order of business is figuring out exactly how much foreign stock exposure you have and settling on an appropriate proportion. Most brokerages offer online programs that automatically track your diversification. But be sure to check your U.S. mutual funds, too. According to Morningstar, the average U.S. fund now holds about 7.4 percent in foreign equities.
So what's the right amount? That depends on your time horizon and tolerance for risk. Investing in companies in emerging markets can come with added risk over the short term. The thing is, unlike the modest growth in developed economies, "these [emerging] markets are still growth markets," says Sarah Ketterer of the $5 billion Causeway International Value Fund, who keeps about 10 percent of her personal portfolio in emerging markets. "And that will probably rise given the way they're performing."
Of course, if you plan to retire soon or think you'll need to cash out, say, to make a down payment on a house, holding a substantial portion of your wealth in foreign currencies does represent a risk.
• Divvy up foreign stocks just as you would a U.S. portfolio. Given the huge stock returns generated by some emerging economies, you might be tempted to make a big bet on the flashiest play. But again, you should spread your bets overseas just as you would here at home. "You never put all your eggs in one basket, especially the hottest basket," says Antoine van Agtmael, chief investment officer at Emerging Markets Management. "Right now the hottest basket is China." Van Agtmael has put some $20 billion to work in a broad spectrum of markets, including Brazil, Mexico, the Czech Republic, Slovakia, Dubai, and Nigeria. "We try to not be in the middle of the party but a little bit on the side of the party."
Jonathan Clements, author of 25 Myths You've Got to Avoid—If You Want to Manage Your Money Right, suggests putting half of your foreign holdings in blue-chip stocks from developed countries (such as the iShares MSCI EAFE-based index fund), then splitting the rest evenly between an emerging-market index (like the iShares Emerging Markets Index) and a small-cap stock fund (such as T. Rowe Price's International Discovery Fund). He and Siegel both favor broadly diversified funds, such as Vanguard's Total International Stock Index Fund, an amalgam of its European, Pacific, and emerging-markets funds.
• For once, don't hedge! Whichever funds you choose, Clements advises, "make sure they don't hedge their currency exposure." Hedging, after all, would dilute the benefits of investing overseas. "Half the benefit of owning foreign stocks," Clements notes, "is that you can diversify the currencies you hold." Then, weak dollar or no, you'll have plenty of pesos to spend when you retire to that Mexican villa.