Masters Series: The Best Foreign Stocks Are Right Here at Home

Editor's note: With the health of the U.S. economy dependent on government manipulation… many investors are anxious to protect themselves by diversifying their portfolios into foreign assets.

But that's often easier said than done…

As Extreme Value editor Dan Ferris writes in today's edition of our weekend Masters Series, buying stocks that trade in places like Brazil, India, and Shanghai can be complicated and come with large fees.

Investing in the stock funds is also risky… Since our free e-letter DailyWealth first published this essay in September 2010, both the China and Brazil indexes have fallen from their 2010 highs… But India remains popular. The S&P BSE Sensex index of Indian stocks hit a 52-week high last week and is flirting with its all-time high of November 2010.

Instead… as Dan suggests in the essay below... there's an easier and safer way to diversify your investments outside the United States.

The Best Foreign Stocks Are Right Here at Home
By Dan Ferris, editor, Extreme Value

China, India, and Brazil were poor, "Third World" countries not long ago.

Today, they're making investors rich.

India's Sensex index has risen 20%, just since last November. And the iShares MSCI Brazil fund is up more than 100% since early 2009. The China Shanghai index rose from 1,100 to 5,900 in just two years, 2005 to 2007. That's more than five times your money.

There's definitely money to be made in growing foreign markets.

But you should be very, very careful about betting on a whole country's stock market. In this essay, I'll show you a much safer way to profit over the long term from these hyper-growth situations, rather than blindly buying hot foreign "story stocks," like most folks do.

Stock markets that shoot up quickly can, and usually do, fall just as quickly. Buying a whole stock market isn't really investing, anyway. You're just betting on the direction of a whole country's stocks – and there's no way one person can know enough to invest in every one of those stocks. It's not really investing. It's more like gambling.

But it's still a good idea to invest in foreign stocks.

You don't want all your investments in one country. If the U.S. economy continues to suffer, all of your investments could suffer, too. It's better to spread your money around, so you can take advantage of good things happening in other countries.

Fortunately, it's easy to make safe, liquid investments in foreign countries. It's just as easy as investing in the U.S. You don't have to open a special account or deal with a foreign broker. You don't have to worry about foreign laws or taxes. Here's why...

Some of the world's biggest, safest, most profitable businesses get more than half their sales from outside the United States.

They're the easiest and best foreign investments you can make. Here are five companies from a list of elite companies I follow...

You can invest in foreign markets and still get the peace of mind of buying safe blue-chip stocks. When the market crashed in 2008, investors in stocks like these had nothing to worry about. They made a safe 6% return on McDonald's... even though the stock market fell almost 40% by the end of the year.

Now that you know McDonald's gets 65% of its sales outside the U.S., won't you sleep better as a McDonald's shareholder, even if the U.S. dollar gets worse? Foreigners will be able to buy more McDonald's products, and McDonald's loyal customers and strong brand name will allow it to raise prices in the U.S. to adjust for a weaker currency.

When you buy great companies with high foreign sales, you often get a growing stream of dividends, too. Procter & Gamble has raised its dividend every year for 56 years in a row. Colgate-Palmolive's dividend has increased more than 11% per year over the last 10 years.

It can be complicated and difficult to buy stocks in foreign markets. You and I aren't allowed to invest in stocks in India, for example. We have to go through complicated and expensive legal procedures to do it. Other countries have all kinds of taxes. A subscriber recently wrote to me and said there's a 25% withholding tax on some of his foreign stocks, even in his IRA. His broker says there's nothing he can do about it.

There's little need to invest in foreign stocks. It's much easier to stick to the best-quality U.S.-traded stocks – and find the ones that have more than half their sales outside the U.S.

If you know nothing else about investing in foreign stocks except this simple, powerful idea, you'll outperform 99% of investors who spend their time trying to find the next hot foreign stocks.

Good investing,

Dan Ferris

Editor's note: Every month in Extreme Value, Dan shows subscribers how to grow their wealth by focusing on the stocks of high-quality businesses and buying them when they're on sale.

Dan's ability to pick very safe stocks that generate outstanding performance has made Extreme Value one of the most widely read advisories in the world. It's highly respected on Wall Street because of its unique focus on value, safety, and quality. And it has a great track record. To learn more about Dan's work and how to subscribe to Extreme Value, click here.