Most American investors don’t understand the rationale for investing beyond our borders.

That’s not terribly shocking, when you consider the immense size and diversity of the U.S. economy, and the $22 trillion “market cap” of our stock market.

So folks simply don’t feel like they “need” to look outward to build wealth; U.S. investors held almost no foreign stocks in the 1980s.

That edged up to about 5% of their stock portfolios during the 1990s and has crawled up to about 15% now.

Now, that may sound like a lot, but research suggests that the correct level might be something like 30%.

I’d like to see every one of my readers hit that mark – because, as you’ll see in a minute, owning foreign stocks can not only slash your risk, but boost your returns as well.

Then, to get you started on the road to a truly global portfolio, I’ll reveal the name of one of my absolute favorite overseas “aggressive growth” stocks…

There’s Nothing Wrong with Investing in America, But…

“The basic problem is something called ‘home bias,'” says Simon Moore, author of “Digital Wealth and Strategic Project Portfolio Management” and a frequent investment writer.

“We like to hold what we feel comfortable with. Often that means favoring domestic investments over international ones. The average U.S. investor is more familiar with Facebook than Tencent and Exxon than Shell. That’s not surprising, because the former are U.S. companies and are well positioned for U.S. markets. We see U.S. companies more during our daily lives and are more familiar with the working of U.S. businesses and the U.S. economy.”

University of Pennsylvania Wharton School of Business Professor Karen K. Lewis says that a well-diversified global stock portfolio can cut your risk by a few percentage points a year over a portfolio of U.S. stocks – or boost returns by a half percentage point or better.

Academic models say the foreign-stock allocation should be anywhere from 30% to a 50% weight, though most research studies say around 30% is ideal.

(As Moore notes, Stanford, Harvard, and Yale appear to have far more in foreign stocks than in U.S. ones.)

That said, there are a lot of arguments to be made against foreign investing.

For instance, here in the United States:

  • Markets are more transparent.
  • The regulatory structure is more defined.
  • Earnings reports are more detailed, clearer, and more carefully reviewed.
  • There’s a greater degree of disclosure required.

But the need to invest in foreign stocks is more long term than immediate.

In other words, I’m investing for the world that my sixth-grade son Joey will be investing in after he gets out of college and is making money of his own.

To flesh out this argument in an even realer way, let me share the argument I give folks when detailing the “investment case” for one of my very favorite foreign stocks – single-stock wealth machine play Alibaba Group Holding Co. Ltd. (NYSE: BABA).

You’ve Got to Go Where the Growth Is

Whenever I “re-recommend” Alibaba, the No. 1 protest I get is the “China scares me” argument.

Granted, China has problems. There are debt worries. There’s likely a real-estate bubble. And because it’s not a free market, there’s always the “friction” that scrubs off the growth potential in such less-than-efficient economies.

But China’s not going away, and in the long run, these issues just don’t matter.

The world economy is shifting – with the nexus of global trade moving from North America to Asia.

Back in 1985 – when the global economy was worth $19 trillion in “real” terms – North America, Western Europe, and Japan accounted for two-thirds of all global growth.

Back then, China and the rest of “emerging” Asia accounted for a mere 18%. And the global economy was growing much faster – at a 4% pace.

Fast-forward three decades, and this scenario has reversed.

Now, two-thirds of “real GDP” ($114 trillion) is due to China and emerging Asia, while the former “big three” account for just 29% of what the world produces.

A lot of numbers, to be sure – but those numbers tell us there’s only one accurate conclusion to reach about China’s future: namely, that it will be bigger than belief, outrageously wealthy, and extremely powerful.

The other point of protest I hear a lot is the fear that China may stumble or even experience a financial implosion. There’s a lot of “hidden debt” stuffed under the cushions of China’s economy. There are issues with propped-up government-run firms, that dodgy real-estate market, and other issues I’m not even mentioning.

So there very well could be a correction, or “stumble,” if you like.

But think of it this way…

Go back to 1900, when the U.S. economy was a paltry $20.7 billion (nearly $500 billion in today’s dollars). And then think about all that we’ve traversed since then.

We’ve had two world wars and such “lesser” military actions as Korea, Vietnam, and the two Gulf Wars. There was a Great Depression and a Great Recession.

As UK Prime Minister Winston Churchill once said, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

Investors need to ignore any near-term turbulence – and there will be some – and focus on the big opportunities there will be in the long run.

If you find it tough to keep that in mind – or if you get nervous when something that seems “really bad” plays out in the markets – then consider this…

We’ve seen two severe financial “panics” (1907 and 1910-1911) and the savings and loan crisis. We’ve had political assassinations, the race riots of the 1960s, and the terrorist attacks of 9/11. And I could easily cite plenty of other “events, scandals, and scares.”

Even with such obstacles, the U.S. economy has grown from the $21 billion upstart of 1900 to the $20 trillion behemoth it is today.

China is going to travel – is travelling – that exact same route.

That’s why we can look at Alibaba and say – with confidence – “You ain’t seen nothing yet.”

I feel the same way about this insurgent Chinese company…

It’s True: Coffee Is Rarely a Bad Bet

It’s high time you owned Luckin Coffee Inc. (NASDAQ: LK) – the “Starbucks of China.”

Luckin went public this spring, and we first told you about it back in June. While the U.S.-China trade war has savaged China-focused stocks, Luckin has “bucked the trend” – and is already up more than 16% (100% on an annualized basis).

It’s so successful in China that U.S.-based heavyweight Starbucks Corp. (NASDAQ: SBUX) is copying upstart Luckin’s strategies.

Unlike Starbucks, Luckin shops are tiny, with just a small serving area for the one or two baristas and a few stools where customers can sit while they wait for their brew.

When Starbucks announced the rollout of its new concept store, this “concept” was a thinly veiled imitation of Luckin. Its first store has no seats at all, and like Luckin, Starbucks’ on-the-go customers at the new store are encouraged to place their orders ahead of time on a special company app.

Luckin is trying to counter-punch by unveiling a new tea drink brand dubbed Xiǎolù (“Little Deer”) Tea. It rolled out four fruity summer drinks in April. Now the company will gradually introduce a range of tea-based beverages – some new, some traditional – in its 3,000 stores across 40 cities.

This decision to offer juices and tea-based beverages is part of a broader strategy. If you look at where Luckin is spending its ad dollars and giving discounts, it’s clear the company is driving customers toward cool drinks and light meals – diversifying its revenue and cementing its relationship with the white-collar Chinese professionals whose incomes are rising.

As it did with Luckin’s bare-bones stores, Starbucks is now copying Luckin’s expansion into tea drinks. In mid-April, it launched eight such drinks ahead of the summer season.

The Luckin-Starbucks battle for the increasingly flush wallets of Chinese consumers is just getting started. It promises to be long and profitable for investors who have the savvy to be where the action is.

— Bill Patalon

Source: Money Morning