Suddenly, Americans are losing their timidity about investing abroad. Last year, $13.7 billion poured into foreign stocks, up a huge 813 percent from 1988.
I see four strong reasons for putting maybe 20 percent or 30 percent of your money into foreign stocks:
To own a piece of other countries' growth. Right now, economic growth in Australia and parts of Europe, Asia and Latin America is faster than growth in the United States. So their stock markets should do better.
To invest in currencies other than the American dollar. U.S. investments are fine when the dollar is strong, but they lose ground against foreign investments when the dollar is weak, as it has been recently. Adjusted for dollar changes, five foreign markets beat ours during the 1980s: those of Japan, Holland, the United Kingdom, France and Germany.
To invest in the world's strongest regional trends -- the emergence of Western Europe as an economic superpower; the rebuilding of Eastern Europe; the growth of consumer markets in Asia, as its armies of workers rise to the middle class; and rapid growth in low-wage countries whose governments welcome private investors.
To reduce the risk to your investments overall. Foreign markets often are strong when U.S. markets are weak, and vice versa. If you're invested in several countries, your risk is less than if you were in one alone.
You have to learn one new concept when you invest internationally -- what happens when the value of the dollar rises and falls on international markets. A rising dollar hurts your investment; a falling dollar means extra profits.
Take a $100 German stock whose German price remains unchanged. If the dollar drops by 5 percent against the German mark, the American price will go to $105 -- because each mark is now worth a larger number of dollars. Conversely, if the dollar rises by 5 percent, your $100 stock will drop to $95 -- because each mark is now worth fewer dollars.
Investment gains or losses in foreign markets come in two parts -- changes in the market itself and changes in currency values. Together, they make up your total yield. In the second quarter of this year, the French stock market rose 3.6 percent while the falling dollar was adding 2.4 percent to the value of the franc. Combining those gains means that the return to dollar investors came to 6 percent, according to Morgan Stanley Capital International.
The simplest way to invest abroad is through diversified, open-end mutual funds that always trade at the net asset value of the securities they own. An "international" fund buys securities everywhere but in the United States. A "global" fund buys worldwide, including the United States. A "regional" fund sticks to a small group of countries, like Europe or the Pacific Rim.
Single-country mutual funds tend to be closed-ends, which trade like stocks. If their market price is higher than the net asset value of the securities they hold, they're said to be trading "at a premium." If the market price is lower, they're "at a discount."
When you buy at a premium (or when the fund is newly issued), you're setting yourself up for a fall because these funds almost always drop to discounts, eventually. Some diversified funds also are closed-ends.