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If you are concerned by the recent performance, or lack thereof, registered by your investments, it may be time to consider adding an international dimension to your stock portfolio.

The benefits of allocating part of your investments to markets outside the U.S. have long been known; in fact, during the 1970's, 1980's and as recently as the early 1990's, international equity markets regularly outperformed those in the U.S.

Unfortunately, the last several years have seen the combined effects of a roaring U.S. stock market, strong U.S. dollar, and periodic crises in East Asia, Japan, Russia, and South America contribute to disappointing results abroad. And when foreign stock markets recorded losses even larger than those seen in the U.S in 2000 and 2001, international equity investors were starting to wonder whether it was time to "domesticate" their portfolios once and for all.

There are signs, however, that international equity markets may be poised to regain some of their allure. And that makes it a good time to think about incorporating a bit of foreign content to your portfolio.

To begin with, there is a good chance that Asian and European equities will outperform domestic stocks this year. In the first half of 2002, overseas investments were not as negatively impacted as U.S.-based funds, with the Morgan Stanley EAFE Index (the benchmark used to measure the performance of non-North American stocks) incurring less than half the percentage loss posted by the S&P 500 Index.

The falling U.S. dollar was one of the main reasons for the foreigners' gains. A weakening U.S. currency is good news for international equity investments, and this trend is expected to continue. The slowing of the massive capital inflows the U.S. experienced over the last few years is expected to result in a downward drift for the dollar. This has already been evident in the relationship between the U.S. dollar and the euro, the printed currency that is used by 12 European nations. Since reaching a low of $.082 in October 2000, the euro has steadily increased, and has recently approached parity with the dollar. Goldman Sachs expects it could reach $1.12 over the next 12 months.

But there is more than just the currency factor at work. Essentially, foreign companies are simply better values right now than their U.S. counterparts. While there are some bargains to be had on the U.S. scene, overseas markets are cheaper. This is reflected in lower price-to-book value and price-to-earnings ratios for EAFE Index companies than for S&P 500 firms. That represents an excellent buying opportunity.

There are also long-term trends that bode well for international markets. The increased availability of news, speed of communications, and globalization of finance has led to growing overseas interest in stock ownership and long-term investing. Mutual funds (particularly equity funds) in Europe and Asia are experiencing impressive growth, and have been the beneficiaries of increasingly active individual and institutional investors. Add to this the ongoing privatizations in many countries, government tax cuts, pension reforms, and increasing worldwide focus on shareholder value, and you have a favorable environment for foreign companies to start up, expand, and thrive.

Finally, it is important to keep in mind that, while the U.S. market is the largest in the world, it still represents only about half of the worldwide equity opportunities available to investors. Factor in the widening domestic accounting scandals, the potential for American military action in the Middle East, and the fact that most foreign economies are expected to perform at least as well, if not better than, the U.S. over the next 10 years, and it makes sense to devote a portion of your portfolio to non-U.S. markets.

What's the best way to add an international flavor to your investments? Earmarking 5-10% of your portfolio for foreign content is considered a good start. If you're looking for a one-world, one-fund approach, consider a global fund that invests primarily in American companies while maintaining some exposure to overseas markets. If you already have U.S.-only equity funds, you can add a solid international fund that seeks out overseas bargains.

As always, read the fine print: you must be comfortable with both the investment strategy the fund manager employs, as well as how, on a regional basis, their assets are concentrated. For example, some funds favor Europe, which offers relatively stable, broad, and liquid markets, while others emphasize the heightened opportunities available in "emerging markets" where higher potential rewards may require increased risks.

However you get there, going abroad with part of your investments is an excellent way to diversify portfolio risk while participating in the competitive returns the rest of the world has to offer.

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