Why do investors need foreign stocks or funds? Why not just buy U.S. companies that do a great deal or even most of their business overseas? That list includes such blue chips as Coca-Cola, Colgate-Palmolive, McDonald's, Procter & Gamble, and 3M, for instance. “Such companies are primarily consumer product-driven businesses that depend on consumer demand for profitability,” points out Marilyn CapelliDimitroff, who heads Capelli Financial Services in Bloomfield Hills, Michigan. “For effective diversification, clients should own companies in other sectors, including natural resources, health care, technology, finance and industrials. Good companies in these areas are often found globally.” Similar comments come from Larry Swedroe, principal and director of research at St. Louis-based Buckingham Asset Management. “Multinationals tend to trade more like their local stocks than global stocks,” he says. “They also trade like other multinationals, more so than small international companies, which are more dependent on their local economies. If you want global diversification, you need to go small and you need to go into emerging markets in order to be most effective.” DIVERSIFICATION AND FLEXIBILITY Dimitroff lists some specific types of diversification as well as other reasons to hold foreign equities.

Mark Balasa, co-CEO and chief investment officer at Balasa Dinverno Foltz, a private wealth management firm in Itasca, Illinois, agrees that the scope of the non-U.S. equity market provides advisors with excellent opportunities to add value. “We look at the international market as having four main categories,” he says. “You can invest in the developed nations of Europe, in Japan, in other developed nations, and in the emerging markets. If you want to underweight Europe and overweight emerging markets, for example, you can do that. Going global offers tremendous flexibility.” IMPERFECT CORELATION

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