The world has gotten a lot smaller in recent years. But far too many investors haven't understood the ramifications of the rise of the global economy -- and their portfolios reflect that lack of understanding far too well.
In order to be a smart investor, you have to be able to adapt to changing times. Although focusing entirely on U.S. stocks has worked extremely well for decades, investors who keep that tunnel-vision approach are increasingly likely to miss out on the best stocks for tomorrow.
At first glance, it's understandable why so many investors never bother with foreign stocks. It's a lot easier to put your money behind a company whose products you're quite familiar with, especially when you know that it's subject to laws, economic conditions, and business customs that you've lived under all your life.
By contrast, foreign stocks raise all sorts of uncertainties. Legal systems and prevailing ways of doing business can be completely different, putting investors in an unfamiliar situation. Even finding basic information about companies can be a challenge, especially when they're based in countries where English isn't the prevailing language.
Moreover, U.S. companies have increasingly relied on penetrating international markets as the main source of their growth. If the stocks you already own can effectively give you international exposure, then why should you bother with foreign stocks at all?
The simple answer is that in most industries, you can no longer count on the American contingent to produce the biggest winner. Especially in up-and-coming industries, new participants have a lot more room to run.
One obvious example is the Chinese Internet market. Many investors steered away from China's start-ups Baidu (NAS: BIDU) and SINA (NAS: SINA) early on, figuring that Google would eventually step into the Chinese market and assert its natural dominance of the search space. Yet fast-forward to today, and Google has largely given up on China, effectively ceding more than a billion customers to Baidu, SINA, and their smaller competitors. And conversely, Baidu has taken steps toward expanding internationally itself -- refusing to allow the threat of Google to fence it inside its home market.
Another industry in which foreign players could give you much stronger gains is energy. Around the world, new resources like shale gas have popped up, giving exploration and production companies worldwide new opportunity for profit. Although U.S. oil majors are doing their best to grab up their share of international resources, there'll always be room for smaller regional and local E&P companies -- and they'll have the potential for explosive growth if they make the right finds.
For instance, Australia's InterOil (ASE: IOC) is a small company whose main prospects are in Papua New Guinea. InterOil hopes to take advantage of natural gas there and build a liquefied natural gas export facility. Although the project has had its ups and downs, a successful outcome could lift the company's shares strongly.
Finally, banks and other financial institutions are a potential source of outsize gains. Increasingly, the Federal Reserve and banking regulators will hamstring U.S. banks with more extensive regulation. Although European banks may face similar if not tougher regulation, emerging market financial companies in countries with a more lax regulatory environment will have the opportunity to boom -- even if the boom eventually ends in a bust similar to the U.S. and European financial crises.
Spain's Banco Santander (NYS: STD) has done a good job of looking beyond its borders for growth, creating subsidiaries in several Latin American countries. Although U.S. banks certainly have exposure to emerging markets, they may not have the capacity to expand as much as they arguably should. That could give international players a big head start -- one from which U.S. rivals may never recover. And with spinoffs Banco Santander Brasil (NYS: BSBR) and Banco Santander Chile, you can pick and choose specific exposure to those subsidiaries.
If you've never considered international stocks before, it's time to take the blinders off. The risk of missing out on the best performers in up-and-coming economies is simply too great for you to ignore the companies that call those nations home.
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At the time this article was published Fool contributor Dan Caplinger lets his money travel the world. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, SINA, and Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is your passport to global investing.
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