Chapter 5
Foreign Stocks
The world stock market had a capitalization of $35.0 trillion in 2008. Of that total, the U.S. stock market had a share of only 33.6 percent.1 Another 39.9 percent consisted of stocks from the other industrial countries, with the remaining 26.5 percent being stocks of the so-called emerging markets. Many of the larger firms in these foreign markets are household names in the United States. In fact, many Americans may not even know that Nestle, Unilever, and Philips are foreign firms. Yet American investors have only small proportions of foreign stocks in their portfolios. They often regard foreign stocks as too risky.
It’s actually more complicated than that. International investing goes in and out of favor in the United States. In the 1980s and early 1990s, international stock returns were quite impressive, so U.S. investors flocked to international stock funds. Diversifying portfolios made sense to investors when returns were higher abroad. Then throughout the late 1990s, foreign stock returns lagged those in the high-flying U.S. markets. Arguments for international diversification fell on deaf ears when investors became caught up with the excitement of the fabulous returns on U.S. stocks in the late 1990s, particularly those in the technology industry. Why invest in London or Tokyo when Silicon Valley offers such superior returns? Then from 2002 to 2007, interest in foreign stocks picked up again. Why? A cynic would say that it was because foreign stock ...
