by Archie M. Richards, Jr., CFP^®
November 21, 2005

Don't neglect foreign stocks. Many people do. Here are reasons why, with my responses:

• The U.S. economy is growing faster than those of many other nations. Why bother with the others?

  Okay, the U.S. economy is growing faster than the other developed nations. But in the developing nations, growth is even faster. Everywhere in the world, people want our standard of living. Those who have property rights and the rule of law will get there. They don't even have to develop the technology; they only need to buy it. Guess who they're buying from.

• The stocks of a foreign nation may perform well in terms of that nation's currency. But to spend the money, an American has to exchange into U.S. dollars. If the dollar is weak, the investor loses out on the exchange.

  Yes, you may lose if you buy foreign stocks this year and sell next. But skip that short-term nonsense. Buy for the long run. Over 20 years, currency fluctuations come out in the wash.

• The politics of some foreign nations are more volatile than those of the U.S. Foreign military takeovers are not uncommon.

Those concerns are only partly justified. Major developed nations, like the United Kingdom and Australia are permanent democracies. India, the world's second largest nation, has been a democracy all along and will remain so. The former Communist nations of Eastern Europe now have stable representative governments.

Japan is undergoing highly favorable political changes that will reverse the economic doldrums the nation has suffered for the last 15 years.

France and Germany, both under stress, will see big and eventually positive changes, but not military takeovers.

Politically, some developing nations are more volatile. The Philippines, for example, is still shaky. The Chinese economy is growing, all right - about 10 percent a year. But no nation can continue such rapid economic growth indefinitely with dictatorial leadership and limited individual freedom.

The people of Indonesia, a huge nation, recently had their first free Presidential election, hotly contested. They hit the jackpot in choosing Susilo Bambang Yudhoyono, who's doing a great job.

All over the world, people are gradually learning that big government messes things up and that free markets and limited government make things better.

Even though the politics of some nations are shaky, you should put your money into the stocks of companies from those nations anyway. The reason? The stock prices are lower.

Let's say an American company has $1 million earnings. The company's total market value (stock price times the total number of shares outstanding) is $20 million. The stock's price-earnings ratio (the PE) is 20.

Now take a company in a politically uncertain part of the world. It too has earnings of $1 million. But the market value of that stock might be only $15 million. The lower price-earnings ratio (15) discounts the nation's political risk. You're buying the same earnings at a lower price.

But don't put your money into just one of those nations. Invest in many of them. If one of them suffers political unrest, but the others are growing nicely with stable governments, you're still ahead.

Spread your money far and wide. Acquire Vanguard's European, Far Eastern, and Emerging Market index funds. You'll own about a thousand stocks from many nations. Alternatively, through your broker, you could buy three exchange-traded funds of foreign stocks also run by Vanguard, VGK, VPL, and VWO.

Good news is outweighing the bad. If you wait until everything overseas is perfect, the prices will have risen out of sight. Don't look for perfection in any investment. There are always reasons to buy and reasons not to buy. Things are never perfect.

For 15 years prior to 1994, foreign stocks outperformed U.S. stocks. Then, for about a decade, U.S. stocks prevailed. But beginning in 2004, foreign stocks began outperforming U.S. stocks big time. I expect them to continue doing so for quite some time.

Split the difference. Buy half U.S. and half foreign. Don't forget the foreign. Diversity pays.