There are very few successful investors that only buy one type of security; it pays to diversify your stocks and strategies, notes Charles Carlson of DRIP Investor.
I’ve never understood investors who claim to be only “large-cap” investors or “small-cap” investors or “growth” investors or “value” investors. Anytime you narrow your selection universe, you limit your opportunity set. For example, if you focus your investments solely on large-cap stocks, you’ve basically shrunk your fishing hole to a bathtub.
There are only about 500 stocks in our Quadrix® universe that have market capitalizations greater than $10 billion (the threshold generally considered for “large-cap” stocks), and only roughly 100 stocks with market capitalizations above $50 billion. (Market capitalization is computed by multiplying the number of outstanding shares by the per-share stock price.)
The bottom line is that there are thousands of publicly traded stocks—our Quadrix stock rating system tracks more than 4,000—so if you are focused on only a couple of hundred stocks, you are missing out on possible investment opportunities in more than 90% of the stock market.
Expanding your opportunity set may be the best reason to consider foreign stocks for your portfolio. But it is not the only reason. Overseas investing exposes investors to economies that are growing faster than the US, while broadening an investor’s portfolio diversification.
To be sure, owning international stocks is not necessarily going to put your portfolio at the top of the leaderboard in any given year. And foreign stocks can present their own set of unique challenges, such as political and currency risk.
And foreign stocks do go through periods of underperformance. In fact, international stocks have been laggards relative to US stocks over the last couple of years. Still, there have been market periods during my 20-year tenure of writing this newsletter in which foreign stocks far outpaced returns of US stocks.
The bottom line is that owning the right foreign stocks, as is the case with US stocks, can provide a big lift to portfolio returns over the long term. This article will help pinpoint attractive international stocks. Best of all, these international stocks offer direct-purchase plans in which any US investor may buy the first share and every share of stock directly from the company.
Investing Overseas Via ADRs
Buying individual foreign stocks became easy for any US investor with the advent of American Depositary Receipts. ADRs are securities that trade on US exchanges and represent ownership in shares of foreign companies. Investors buy and sell ADRs just as they buy and sell US stocks.
ADRs are quoted in US dollars and pay dividends in US dollars. And those dividend payments, in many cases, receive the current preferential tax treatment (15% maximum tax rate) afforded qualified dividends paid by US companies. (Remember that the 15% preferential tax rate on qualified dividends expires at the end of this year, unless extended by Congress.)