international investing

[12/14/06] Getting some international exposure in your portfolio may be one of the best things you can do as an investor. Why? Because such exposure -- whether through individual stocks, mutual funds, or exchange-traded funds -- generally provides you the same or even higher potential returns but at lower risk.

Burton Malkiel, a Princeton professor, drove this point home for me many years ago in his book A Random Walk Down Wall Street. I never forgot this paragraph, concerning his 21-year research period from 1977 to 1997:

It turns out that the portfolio with the least risk had 24% foreign securities and 76% U.S. securities. Moreover, adding 24% [Europe, Australia, and Far East] stocks to a domestic portfolio also tended to increase the portfolio return. In this sense, international diversification provided the closest thing to a free lunch available in our world securities markets. When higher portfolio returns can be achieved with lower risk by adding international stocks, no individual or portfolio manager should fail to take notice.

[6/3/06] Building portfolios with the least amount of risk for a given level of return is the foundation of modern portfolio theory. Including international equities in your portfolio helps reduce risk by adding diversification. Professionally managed endowments and pension funds have long recognized the diversification benefits of an international allocation. According to Pension & Investments, the average allocation to international equity for the top 200 U.S.-based pension funds is about 18% of total fund or 25% of total equity holdings.

We confirmed that portfolios with some exposure to international equities had lower risk (as measured by standard deviation) than an all-domestic portfolio for approximately the same level of return.

[5/14/06] Not all Fools see eye to eye when it comes to investing abroad. Some feel that buying a multinational company like General Electric (NYSE: GE) or Coca-Cola (NYSE: KO) will give them the right amount of overseas exposure without buying an actual foreign company like Sony (NYSE: SNE) or Ericsson (Nasdaq: ERICY).