(FORTUNE Magazine) – PREVALENT among U.S. investors not so very long ago was the illusion that putting money into foreign securities was only for daring risk takers. But in recent years more and more Americans have come to understand that having part of your stake invested abroad is prudent, lessening risk rather than increasing it. Taking a global view paid off for investors during the Eighties and should pay off during the Nineties too. It should work well even if growth over much of the globe is slower in the Nineties than it was in the Eighties, as many seers expect. The case for going global is virtually independent of economic forecasts. Diversification's virtue is well established, and investing abroad adds an element of diversity, across national boundaries. Despite all the interconnectedness of national economies, some will be doing better than others at any given time, so having stakes in several countries spreads your risks. It is pretty certain, moreover, that some countries will grow more vigorously than the U.S. during the Nineties. Accordingly, there is a good chance that an American with well-chosen investments abroad will get larger overall returns than a stay-at-home investor. While the U.S. stock market did very well for investors in the Eighties, quite a few stock markets abroad did even better. Morgan Stanley reports that over the decade, the U.S. stock market had a total return of 325%. Very nice, but eight markets abroad topped that by substantial margins, with returns ranging from 431% for Britain to more than 1,100% for Japan and Sweden. Philippe Jorion, associate professor of international finance at Columbia's business school, advises American investors to commit 20% or more of their portfolios to a diverse mix of foreign securities. Those who did so during the years 1978 to 1988, a study by Jorion shows, would have fared significantly better than investors who stuck to the U.S. BUT WHAT DO you do when confronted with a world of stocks -- so many stocks, so little time to choose among them? To begin with, remember that when you buy a foreign stock you also buy into a foreign stock market. The markets where prices are rising the fastest are not always the best to invest in, and neither are those where stocks look extraordinarily cheap. Prices in torrid markets can overheat in a hurry, and low prices sometimes betray high risk. These days four markets -- Chile, Malaysia, Mexico, and the Netherlands -- appear to offer especially good values (see table). It is well to be aware also that returns from owning foreign securities can be wagged by the performance of the dollar in exchange markets. If you buy a + Swiss stock and the dollar goes down relative to the Swiss franc, that increases the value of the stock in terms of dollars. If the dollar goes up instead, that decreases the dollar value of the stock. The dollar's sustained skid against other currencies from 1985 to 1988 gave a big boost to Americans' returns on foreign securities. During that stretch, a Morgan Stanley index of stock markets outside the U.S. climbed a dazzling 210% when measured in dollars but only 76% when measured in local currencies. A divergence that wide, or anything near it, is not in prospect for the Nineties. The dollar may sink some more, but it will hardly keep sinking as persistently as in the past several years. In other words, American investors in foreign securities will be getting less lift from the behavior of the dollar than they enjoyed in the later Eighties. A larger proportion of any returns will have to come from the performance of the securities themselves. An investor who wants to go international has a choice between buying shares in a mutual fund that invests abroad or buying individual stocks. A personal portfolio of stocks might bring larger rewards, but most pros discourage that approach for anyone who has less than $200,000 to stake abroad. It takes at least that much to achieve a prudent degree of diversification. Says George Foot, a partner at Newgate Management, a New York investment adviser specializing in foreign markets: ''The trick to international investing is not to hit the hot stock, but to diversify your risks.''

Even for an investor with a hefty bankroll, it may be sensible to take the mutual fund route abroad. Building a portfolio of foreign stocks is not an undertaking for people short of time -- or patience. Reliable information on foreign companies is often scarce. Accounting conventions vary from country to country. It sometimes takes two weeks or more to settle trades. Withholding taxes levied by foreign governments can bite into dividends. That's not all. Transaction costs are likely to be higher than you meet in buying or selling shares of U.S. companies. Let's say you fancy a $25 Danish stock and tell your broker to buy 500 shares. He executes the order through a dealer in Copenhagen. In effect, you pay two commissions. The transaction costs would set you back perhaps $350, compared with $270 or less on a comparable buy of Big Board shares. On some other exchanges, commissions may run two or three times what you're used to. & It is simpler and cheaper to buy surrogates in the form of American Depositary Receipt certificates (ADRs). These are stand-ins for foreign- company shares that U.S. banks hold in escrow. ADRs are traded like other American stocks. Holders of ADRs that are listed on a U.S. stock exchange receive from the companies regular financial reports, in English, that adhere to U.S. accounting standards. But such ADRs make up only one-fifth of the ADRs available to U.S. investors. The rest are traded over the counter. If you want to invest in a company that is not represented by ADRs, you will have to buy the stock directly. Fortunately, some big U.S. investment firms, including Merrill Lynch and Shearson, have made that easier and less expensive than it used to be. They have established international links that enable them to buy or sell foreign stocks for individual U.S. investors without using a middleman in London, Frankfurt, or Tokyo. You don't escape settlement delays and tax complications, but you pay little more brokerage commission than local investors. For example, if you went through Shearson you would pay $177 in commission and British trading fees to buy 300 shares ($5,700 worth) of British brewer Bass PLC. That's just $28 more than $5,700 worth of Bass ADRs would cost through the same broker. A discount broker, it's true, would charge less for the same purchase, but discounters do not deal in foreign shares, just ADRs. THE EASIER PATH to diversification across national borders is to let mutual funds do the diversifying for you. In the U.S., more than 130 equity funds and more than 40 bond funds invest partly or entirely abroad. On the equity side, Wall Street labeling distinguishes between global funds, which invest anywhere, and international funds, which invest anywhere but the U.S. Both varieties are open-end funds, whose share prices mirror the market value of the securities in the portfolios. Quite another species is the closed-end mutual fund. Restricted in scope to stocks of a single nation or geographic region, such funds have a fixed number of shares, which trade on U.S. and European stock exchanges. At times, eager demand can lift prices of these funds' shares to premiums well above the underlying market value of the portfolios. That happened last year, when four of the ten best-performing stocks on the New York Stock Exchange were closed- end country funds. Some investors who came in late learned a lesson worth remembering: Don't pay a big premium over net asset value. Prices suddenly fell -- in part, it seems, because Japanese buyers who had bid up the funds bailed out. Observes Michael Porter of Smith Barney, who tracks the closed-end funds: ''The danger with such a fund is that you can be very right about the underlying share prices and very wrong about the fund's performance.'' For a scary example, look at the Austria Fund. Between the end of 1989 and mid-September of this year, net asset value rose 13% and the price of the fund's shares fell 45%. The number of closed-end funds has grown rapidly in recent years. So far this year U.S. investment firms have brought out 18 new ones, raising the count to 45. By purchasing shares of single-country funds, Americans can now invest in any of 23 foreign nations. Which countries might be the best to invest in during the year ahead? Mexico certainly merits a look. The government of President Carlos Salinas de Gortari has reined in inflation and negotiated some easing of the country's debt burden. The stock market, up about 35%, has been one of this year's few strong performers, but Mexican stocks still sell for only ten times earnings. As an oil exporter, Mexico stands to gain from the Middle East mess. Christian Wignall, chief investment officer at G.T. Capital, a San Francisco investment manager, estimates that even if the price retreats to $26 a barrel, $8 above the early July level, ''the oil price effect could generate an extra $4 billion in exports and actually bring Mexico's current account into balance.'' The Mexico Fund, still priced slightly under net asset value, offers a way to tap into the country's robust potential. Several Mexican ADRs trade in the U.S. on Nasdaq or over the counter. FARTHER SOUTH, Chile, a disciplined economy by Latin American standards, continues to pull in investment capital. Chile's market-oriented economy is perhaps Latin America's healthiest, and the newly installed civilian leader, Patricio Aylwin, vows to promote privatization. Although the government's battle against inflation has slowed economic growth, long-term prospects seem bright. Last July Cia. de Telefonos de Chile, the country's biggest telephone company, became the first Latin American stock to win a listing on New York's Big Board. With demand for telephone service expanding briskly in Chile, the stock looks promising. You can invest more broadly in the country through the Chile Fund, selling at a discount to net asset value. In Asia, tropical Malaysia has much to recommend it. Companies like Tan Chong, an auto retailer, are thriving amid a consumer spending boom, stoked by industry expanding into Malaysia from abroad. Luring foreign companies are wage levels only half those in comparable Asian countries. Export prospects look good. Says Grace Pineda, who runs Merrill Lynch's Developing Capital Markets Fund: ''Malaysia's main trading partners are other fast-growing Asian countries, so it is less vulnerable to economic swings of non-Asian export markets like the U.S.'' The local economy, in a recession as recently as 1986, is expected to expand more than 9% this year. Malaysia is an oil exporter, and the price rise is pulling the economy into faster growth. SOME ASIAN stock markets that were very rewarding in recent years now look uninviting to U.S. investment pros. Most large international investors unloaded a lot of their Japanese holdings months ago, and some say they won't go back in until the Nikkei index, a lofty 38,713 at the beginning of this year, and lately around 25,000, cools down to 20,000 or so. Already considerably cooler is the recently torrid market in Thailand. South Korea's once rambunctious stock market reflects economic woes, including a speedup in inflation and a slowdown in export growth. Hong Kong's market has come down so far that stocks look cheap, but Britain will surrender the colony to China in 1997, and uneasiness about the future has severely depressed investor spirits. Down under, Australia is beset by inflation, but pros find a few stocks to endorse, some trading at single-digit multiples. John Templeton, chairman of the investment advisory firm Templeton Galbraith & Hansberger, sees sparkling value in Goodman Fielder Wattie, a food company. John Trott, chairman of London-based Kleinwort Benson International Investment, likes News Corp., Rupert Murdoch's media empire. In Europe developments now under way could reward investors, despite the current combination of faster inflation and slower growth. In years ahead a lot of lift will come from the 1992 integration in Western Europe and the revival of capitalism in the East. Moreover, European companies are raising their traditionally skimpy dividend payouts. By the later 1990s, says Glenn Wellman, who heads foreign investing for Alliance Capital Management, the upshot ''will be stock markets in Europe much more like what we know in the U.S.'' ; But for now, the euphoria that Europe aroused in investors last winter has waned. First the economies of France and Italy started looking limper. Then worries set in about the huge cost of German reunification. Then came the Persian Gulf crisis, which led economists to slash estimates of corporate profit growth. With European stock market prospects a bit dim just now, some investment pros say this is a time to consider bonds. In response to inflation fears and strong demand for capital, bond yields in Germany and Britain have bulged. Long-term British government bonds -- called gilts -- now carry yields above 11%, compared with about 9% for U.S. Treasuries. In the view of Kleinwort Benson's John Trott, ''bonds are tough competition for stocks to beat at this stage of the game.'' Beside British gilts, Nicholas Sargen, head of bond research for Salomon Brothers, recommends French government bonds, which yield above 10%. Some economists expect inflation to abate in Europe by early 1991 and interest rates with it, and if that happens, bond prices could go up smartly. THE GERMAN ECONOMY is growing vigorously despite concerns about inflation and oil prices. Some German companies, including Deutsche Bank and Volkswagen, have maneuvered agilely into Eastern Europe and stand to reap handsome payoffs. Says Alliance Capital's Wellman: ''Volkswagen is by far the best- positioned automaker in Eastern Europe. It also has rationalized operations and should capture a lot more cash flow than in the past.'' The British economy may be the palest in Europe, a victim of weak growth and troubling inflation, but some companies still attract investment pros. Scott Black, president of Delphi Management, a Boston investment adviser, likes the ''strong consumer franchise'' and marketing savvy of Bass. Bass, he notes, dominates the English beer market and is increasing its share. The Netherlands, in contrast, has the most robust-looking economy in Europe these days and is regarded as an exceptionally promising area for investment. The economy is strong in transportation and other service industries. Economic growth is expected to run at about 3% at least through 1991. Inflation is still mild. The stock market trades at just nine times earnings. ''Dutch companies have been increasing their margins and growing quite well,'' says Wellman. A favorite Dutch stock? VNU, a magazine publisher that is expanding into legal and technical periodicals.

CHART: NOT AVAILABLE < CREDIT: NO CREDIT CAPTION: FOUR FAVORED STOCK MARKETS Favorable conditions for long-term economic growth and enticing stock values make these diverse and widely sepa rated countries promising places to invest in during 1991. Mexico Chile Malaysia Netherlands

CHART: NOT AVAILABLE CREDIT: SOURCES: ALLIANCE CAPITAL MANAGEMENT; DELPHI MANAGEMENT; KLEINWORT BENSON INTERNATIONAL INVESTMENT; MERRILL LYNCH; MORGAN STANLEY; TEMPLETON GALBRAITH & HANSBERGER CAPTION: 20 FOREIGN STOCKS THAT INVESTMENT PROS LIKE