Over the past five years, in fact, foreign stock funds have averaged a 15% annual gain, compared with just 7% for U.S. large-cap funds, a record that has drawn a flood of new investors.
But you shouldn't expect that kind of extreme outperformance to continue. In a globalized world, a multinational company based in Paris doesn't really face different economic realities from a competitor in Chicago.
And Europeans and the Japanese are facing an even bigger demographic crunch than we are - they're not having enough babies to replace their current population. Emerging markets - that is, less-developed economies including China, Latin America and Russia - seem to offer potential for bigger gains.
But that's because they are also a bigger risk. On average, diversified emerging markets funds rose a stunning 25% annualized over the past five years, but they also lost half of their value during one bad 12-month run in the late 1990s.
And the long-term record of emerging markets isn't as impressive as you might think, says Yale finance professor Will Goetzmann, a leading expert on past market returns. "Despite their risk, emerging markets historically really haven't done that dramatically better over the long term," he says.
And although the fall of the Berlin Wall and the economic emergence of China would seem to herald a new era of opportunity, Goetzmann cautions that some markets can disappear as quickly as they "emerged."
Most investors should keep their emerging markets bet small, perhaps by simply buying a diversified foreign fund that dabbles in those countries. More adventurous types might think about putting 5% of assets in a dedicated emerging markets fund.
