Advantages of not limiting onesí investment to the U.S. market include reducing risk through diversification, taking advantage of an expanded list of opportunities, and exploiting opportunities that arise out of change.

Modern Portfolio Theory demonstrates the premise that one can improve the reward-risk ratio by diversifying oneís portfolio. Not all stocks move in concert with one another. So having a number of stocks will result in less volatility than a single stock. Different industries will benefit and suffer at different times in the business cycle. Thus diversifying among industries reduces volatility. Likewise, the national equity markets do not necessarily move in concert. When one nationís equity markets are down anotherís may be up. Diversifying among nations will reduce portfolio volatility.

Including equities of foreign companies in ones portfolio permits one to significantly expand the list of companies that one can invest in. Many of these companies are the global leaders in their industries. The U.S. market is currently being driven higher by a combination of good earnings growth due to productivity increases, stable monetary conditions, and strong liquidity due to investments by the baby boomer generation. This is leading to ever-higher valuations. At some point equities will become so overpriced that the equities in other world markets will be relative bargains. Money will start moving into these bargains and their valuations will be pulled up.

Exceptional investment opportunities result from change. When conditions are stable, the opportunities are well known and equities are priced according to these known conditions and expectations. When conditions are dynamic, there is a lack of information, a lack of knowledge, and uncertainty about the future. Thus there are opportunities for equities to be significantly undervalued in relation to future events. Of course, the trick is to anticipate those future events. Those events will be positive or negative for equities based on their environments. This paper explores national environments in which those future events will take place.

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Revised: 29 Mar 2001 22:24:57 -0500 .