Productivity at your daily life

Our discussion thus far has focused on expected stock prices and expected rates of return. Anyone who has ever invested in the stock market knows that there can be, and there generally are, large differences between expected and realized prices and returns. Figure 5-5 shows how the market value of a portfolio of stocks has moved in recent years, and Figure 5-6 shows how total realized returns on the portfolio have varied from year to year. The market trend has been strongly up, but it has gone up in some years and down in others, and the stocks of individual companies have likewise gone up and always succeed. In subsequent chapters, we will examine the actions that managers can take to increase the odds of their firms doing relatively well in the marketplace.
Investing in International Stocks

As noted in Chapter 3, the U.S. stock market amounts to only about 40 percent of the world stock market, and this is prompting many U.S. investors to hold at least some foreign stocks. Analysts have long touted the benefits of investing overseas, arguing that foreign stocks both improve diversification and provide good growth opportunities. For example, after the U.S. stock market rose an average of 17.5 percent a year during the 1980s, many analysts thought that the U.S. market in the 1990s was due for a correction,and they suggested that investors should increase their holdings of foreign stocks. To the surprise of many, however, U.S. stocks outperformed foreign stocks in the 1990s—they gained about 15 percent a year versus only 3 percent for foreign stocks.

Figure 5-7 shows how stocks in different countries performed in 2001. The number on the left indicates how stocks in each country performed in terms of its local currency, while the right numbers show how the country’s stocks performed in terms of the U.S. dollar. For example, in 2001 Swiss stocks fell by 22.02 percent, but the Swiss Franc fell by about 7.24 percent versus the U.S. dollar. Therefore, if U.S. investors hadbought Swiss stocks, they would have lost 22.02 percent in Swiss Franc terms, but those Swiss Francs would have bought 7.24 percent fewer U.S. dollars, so the effective return would have been 29.26 percent. So, the results of foreign investments depend in part on what happens to the exchange rate. Indeed, when you invest overseas, you are making two bets: (1) that foreign stocks will increase in their local markets and (2) that the currencies in which you will be paid will rise relative to the dollar.
Although U.S. stocks have outperformed foreign stocks in recent years, this by no means suggests that investors should avoid foreign stocks. Foreign investments still improve diversification, and it is inevitable that there will be years when foreign stocks outperform domestic stocks. When this occurs, U.S. investors will be glad they put some of their money in overseas markets.

Taken From : Five-Minute MBA – Corporate Finance

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