NEW YORK (CNN/Money) - It's been a good year for investors in the U.S. stock market. It's been an even better year for investors who tucked their money overseas.
Take Japan for instance, where traders closed out the year in grand style Tuesday, sending the Nikkei up 1.7 percent before the New Year break. The index posted 24.5 percent gain for the year -- its first win since 1999. Then there's the 36.6 percent jump in Germany's Dax, the 32 percent move in Hong Kong's Hang Seng, and so on.
Factor in the dollar's 14.2 percent drop against the United States' major trading partners and -- from the perspective of U.S. investors -- the gains get even better. Morgan Stanley Capital International oversees a group of individual country indexes that are considered benchmarks for international investors. The U.S. index has risen 26.5 percent this year. In dollar terms, all but three of the remaining 23 country indexes (Britain's, Holland's and Finland's) surpassed that mark.
Morgan's index of world stock market performance excluding the United States is up 34.1 percent for 2003.
Those are nice gains for U.S. investors who participated, but the fact is that most did not. A legacy of the bull run of the 1990s is that investors that put money overseas felt penalized for doing so, because the U.S. stock market regularly outperformed its overseas counterparts. Occasionally, one country or region would put up big gains (think Asia in 1996), enticing people in, but then it would almost often run into trouble (think Asia in 1997 and 1998).
In the years to come, the regret might run the other way. It is rare that the market that leads during one bull market maintains its pole position in the next. Even if U.S. stocks do well, there will likely be some other country that will do better. And investors will imagine how rich they could have been if they put all their eggs there ... just like they imagined in late 1999 what it would have been like if they put all their retirement chips on Qualcomm.
But this should not be the point of investing overseas, or of investing in general, remark Santa Clara finance professor Meir Statman and Assante Asset Management senior research analyst Jonathan Scheid in a recent paper.
Rather, investors should focus on diversification which, Statman and Scheid found, is beneficial even when (as has often been the case over the past two decades) markets tend to rise and fall together.
"We are wise to disperse our assets into many baskets because all eggs in one basket are likely to meet similar fates while eggs in different baskets are likely to meet different fates," they wrote.
In other words, investors shouldn't venture overseas because they are looking for outsized gains (even though they may receive them), but because putting some of their money in foreign markets is a safer thing to do.
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