Diversification is one of the central and crucial elements of investing. In a period of time when nearly all major commentators are panicked about the state of the U.S. and European economies, diversification through the purchase of foreign stocks is more important than ever before. In any period of time during which the U.S. economy is growing and the dollar remains stable, holding foreign stocks is less important if not totally irrelevant.
There is no single percentage figure that makes sense for everyone. Buying foreign stocks hinges on many variables. The most important is the status of the dollar, but very close in significance is the sort of investor you are. Conservative investors invest in western Europe and Japan. Path-breakers look to those parts of the world that are growing but have not yet exploded into the modern economy, such as South Korea in the 1970s or China in the 1990s. As of 2011, Thailand, Malaysia, Indonesia and Nigeria are experiencing such growth.
The status of the dollar is likely the most important variable in efforts to determine how much foreign stock you should buy. A cheap dollar means that — all other things being equal — your foreign stocks will look that much better. From 2001 to 2008 the dollar lost about half its value against the euro. "That means that if European stocks were stable, to U.S. investors they would appear to have risen 50 percent," according to the website Merriman.com. The lower the dollar relative to the other global reserve currencies, the more important foreign stocks become.
The term “foreign” is relative: Buying stock in British automotives is a far cry from buying stock in Nigerian oil securities, Thai timber or Jamaican bauxite. Many investors interested in foreign purchases to diversify are loathe to buy into the poorer economies of the third world. Concerns about instability, local corruption or their own ignorance might leave growing companies out of the purview of the average investor. However, a small percentage of stock in such growing and potentially powerful parts of the world as Nigeria's oil economy or Kazakhstan's gas might be a perfect hedge against continued problems at home.
Investment analyst Jack Piazza writes that for conservative investors, keeping your foreign stocks to about 10 percent of the portfolio's total is a worthwhile hedge. Even here, the “foreign” stock is often western European and fairly stable. Increasing this amount and diversifying into the developing world is riskier, but the potential for growth of the Malaysian automotive industry, for example, or Siberian oil might increase rapidly in the near future.
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