It's 1998. You're handed $100,000 to invest. The catch is you can't invest in individual stocks. You've got to put it all in an index that tracks the performance of one of the following regions: U.S., Asia, Canada, Latin America, Australia, Japan or Europe.
What do you do?
If you'd chosen Japan, you'd have made a 7% profit by November 2009. If you'd chosen Europe, you'd have done more than twice as well - a 20% profit. And you'd have been much better off putting your money in Canada, which would have given you a return of 113%.
But you could have done even better...
If you'd chosen Asia, you'd have made a profit of 179% over the next 11 years. And, if you'd chosen Latin America, you'd have walked away with a profit of 347%.
You could have chosen to put your $100,000 in the U.S. - the biggest and, some would say, the strongest economy in the world. Your money would likely have gone into blue chips like Microsoft, Caterpillar, or Wal-Mart, instead of into foreign companies. You could have bought "Made in the U.S.A." instead of "Made in Mexico". But you would have made exactly zero profits.
Believe it or not, between March 24, 1998, and November 16, 2009, the U.S. S&P 500 went absolutely nowhere. Not only that, but studies show that owning stocks in international companies can cut your risk in half. So, if you're thinking about where to put your money in 2010 and beyond, include some foreign exposure in your portfolio.
But how do you go about investing in the best foreign stocks?
Many foreign stocks simply aren't available to Americans because of laws and regulations governing the buying of stocks overseas. One way is to buy a fund that's listed on a U.S. exchange. These allow you to capture international growth without traveling outside your hometown.
But there's another way to capture gains in these fast-growing economies: ADRs (American Depositary Receipts). ADR prices are in U.S. dollars, pay dividends in U.S. dollars and can be traded like the shares of U.S.-based companies. Investing in ADRs has another important advantage: It allows you to easily diversity away from the U.S. economy and avoid the mistake so many investors made when they bought in 1998 and held on.
America's accelerating debt and expanding federal bureaucracy are bad for investors
The prevailing political climate will sink America deeper into public-sector debt and a federal bureaucracy that's unlikely to be investor friendly. Developed economies are projected to have rising deficits and debt burdens in the next five years, on top of a much higher level of indebtedness, while emerging economies are likely to have falling levels of deficits and debt burdens with already much lower levels of indebtedness. High debt levels will continue to restrain growth in the West, while lower debt levels will support growth in emerging markets. Economic growth will be higher in emerging markets as those economies grow from smaller bases.
Asia's the place to be
So, if you're looking to invest in places that offer organic economic growth - based on a savings-and-investment cycle (not rising leverage ratios like in the West) - you have to invest in emerging markets, mainly Asia. The right emerging markets, like those in Asia, will outperform Western ones over the long haul, as they have much better fundamentals. Pullbacks in Asia should therefore be viewed as buying opportunities.