If You're Like Most Americans, Your Portfolio Is Riskier Than You Think

Editor's note: Our friend and colleague Kim Iskyan leaves no stone unturned.

He has traveled to more than 70 different countries (and lived in 10) in search of the best investment opportunities. Today, Kim is the publisher of our affiliate, Stansberry Churchouse Research.

In this weekend's Masters Series, we're sharing an exclusive two-part interview in which Kim details some of the most important things he has learned in his 25 years of "boots on the ground" experience.

In the first installment, Kim discusses the risks and benefits of venturing outside of your home market...

If You're Like Most Americans, Your Portfolio Is Riskier Than You Think
An interview with Kim Iskyan, editor, International Capitalist

Sam Latter: Kim, you've been researching and investing in foreign markets for years. But why is it important for the average U.S. investor to get exposure to international stocks?

Kim Iskyan: Most investors know not to put all their eggs in one basket.

This idea of diversification sounds simple. You spread your risk across different types of assets... So when the value of one drops, it isn't so bad for your overall portfolio. If you've diversified correctly, your other holdings will offset – or even negate – the loss.

But most investors struggle with proper diversification...

Many investors think their portfolios are diversified because they hold a large number of securities, whether directly or through funds. However, if most – or all – of your assets are in American stocks, bonds, and U.S. dollars, all your eggs are on the same truck. If the truck crashes, all of your eggs are going to break.

What happens if the banking sector goes bust? What happens if the U.S. dollar loses a lot of its value? What happens if the real estate market crashes?

You might think you're diversified, but when it gets down to it, you're not diversified at all.

But you can diversify your holdings by investing in other countries around the world. Even if U.S. stocks dip, your whole portfolio won't be tied to one market or economy.

In today's uncertain times, it's imperative that you never have all your eggs in one basket.

Sam: What about the U.S. specifically? Do you see any particular risks by only investing here?

Kim: The biggest risk with only investing in the U.S. is that it makes you more exposed to U.S.-listed companies than you should be, based on a breakdown of the world's markets.

You see, the average American has about 80% of his money invested in U.S. stocks. But American stocks account for only 51% of total global market capitalization – that is, the value of all stock markets in the world.

This excessive exposure to U.S. markets can be catastrophic for your portfolio if we see another downturn. And while U.S. stocks have enjoyed a massive bull market since the global financial crisis, they won't keep going up forever. They're far more expensive than other markets... In fact, they're approaching the global financial crisis and dot-com peaks. The U.S. bull market is likely winding down.

Sam: We've covered the risks of being overly invested in your home market... but what are the benefits of investing abroad?

Kim: If you're only investing in your home market, your profits will be limited.

The U.S., for example, is a developed country. It's not going to experience massive growth like it did during the consumer boom in the 1950s. And if the economy experiences a downturn, most businesses will also suffer... along with their share prices.

But if you're willing to invest in markets all over the world, you can always find growth. You can always find a market – in some asset or in some country – that's poised to deliver huge, life-changing gains. Right now, we see a lot of growth opportunities all over the world.

Consider this: Consulting firm PricewaterhouseCoopers predicts that developed countries like the U.S. and the U.K. are going to grow around 2% a year between now and 2050. Meanwhile, countries like India, Bangladesh, and Vietnam are all predicted to grow about 5% annually over the next few decades.

And not only are these markets growing much faster than developed countries, they're also cheap – particularly compared with the U.S. markets. Many emerging markets trade at discounts of up to 70% to U.S. markets. Countless studies have shown that over the long term, buying cheap markets is more profitable.

The benchmark S&P 500 Index is up about 12% so far in 2017. But if you only invested in the U.S., you'd be missing out on gains in Vietnam (up 38%), India (up 35%), and China (up 40%). Investors with most of their money in the U.S. are missing out on big gains in other markets around the world.

Sam: Why does this opportunity exist to get foreign blue chips so cheap? And why do you see so much growth in them?

Kim: As I said earlier, most investors tend to stay in their home market. They want to invest in what's familiar to them. That means they're ignoring one of the biggest trends in the world today: the rise of the global middle class.

You see, all over the world – especially in emerging markets in Asia – the middle class is growing in size.

We expect to see 550 million middle-class people in China by 2022. That would make China's middle class alone big enough to be the third-most populous country in the world. And India isn't far behind... According to the World Economic Forum, India's middle class could grow larger than China's by 2027.

So while emerging markets like India and China aren't on many investors' radars right now, folks looking for growth will need to turn their attention to these markets in the near future.

When that happens, we will see soaring share prices in those countries.

Sam: When it comes to investing in "off the radar" markets, what types of gains are we talking about?

Kim: Let me give you two good examples.

When most people think of Sri Lanka, they think about its 26-year-long brutal civil war. Investing in Sri Lanka isn't even something the vast majority of investors are thinking about today.

But when I moved there with my wife and two small children in 2011, it didn't take me long to see huge moneymaking opportunities there. Through my network, I was offered the chance to invest in a peaceful beach hotel. I jumped at the deal.

Most people would balk at the idea of investing in a former war zone. But my investment in the beach hotel paid off handsomely... I more than doubled my money in just two years.

Or consider Russia... Most investors won't go near the market. The country is considered too "dangerous" for investment today. But it's where I found one of the best-performing stock recommendations of my career. Between February 2002 and April 2008, the investment ended up making a 3,700% gain... turning every $10,000 invested into $380,000.

Sam: In less dangerous countries, is there still a big risk to your investment capital?

Kim: Every country poses its own risks to investors. That's why it's so important to use diversification, asset allocation, and stop losses.

But in many off-the-radar countries, you'll find the risks are grossly overstated.

Consider China, for example. In recent years, many people have developed a negative image about the country. There's a steady stream of negative news, from its ghost cities to its zombie companies, slowing economic growth, and pollution problem.

So you'd be forgiven for thinking that it's risky to invest in Chinese companies.

But a lot of these concerns are overblown... and exaggerated by investors who have a vested interest in driving down asset prices in China. If I'm a big hedge-fund manager with a large short position in the country, I'll do everything I can to talk it down.

What's more, these issues often obscure the reality that China is quickly becoming a world leader in many areas...

For example, the country is staking its claim as the preeminent force driving globalization through its One Belt One Road infrastructure initiative. This ambitious plan calls for the development of new infrastructure to expand trade to Russia, Central Asia, the Middle East, and other areas of the world.

China is also becoming a leader in the technology and "fintech" spaces. (Fintech refers to the computers and other technology used to support the banking and financial-services industries.) And as I mentioned earlier, the country is seeing a massive wealth explosion in its middle class. That's going to continue in the coming years.

China is quickly overtaking the U.S. and other developed countries in many areas.

That doesn't mean investing in China isn't risky, of course... As I said, every country poses some risks for investors. But the reality is that it's a whole lot less risky than the financial media often portrays it.

Sam: What do you say to people who think it's difficult to invest in foreign stocks? Will I have to open a brokerage account in, say, Turkey?

Kim: Investing in foreign stocks is often just as easy as investing in U.S. stocks.

Many foreign stocks trade on exchanges you're already familiar with, like the U.S., London, and Hong Kong exchanges. So in order to invest in foreign stocks, you likely won't even have to switch brokers.

With just a few clicks of a mouse, you'll be able to buy a large range of foreign stocks right through your brokerage account.

Editor's note: Kim launched International Capitalist as a way to help his readers diversify their holdings into the high-upside opportunities that he uncovers in his travels around the world. Some of these fast-growing markets could lead to investments that return 500% or more in a matter of months. Learn more about a charter membership – and how to subscribe to International Capitalist at a big discount to its regular price – right here.