Add up the value of all the stocks in the world, and you'll find that U.S.-based companies account for less than half. So if your portfolio is as American as apple pie, maybe you should add a scoop of foreign stocks. "If you want a diversified portfolio, you need to have international exposure," says Kirk Kinder, a Palm Harbor, Fla., adviser who urges clients to invest 20% to 25% of their money overseas.

Now is a good time to explore international investing, because many foreign markets are cheap compared with the U.S. market. "There is a little bit more risk, but there is great potential for more return," says Rajiva Goyal, 42, a Tampa physician who keeps one-fourth of his portfolio invested outside the U.S. "Overall, I don't expect more than 5% or 6% from my U.S. stocks, but I hope I will get more from international investments."

The outlook for stocks in Japan has brightened after a nightmarish, 15-year downturn. Increasingly confident consumers are spending cash that had been squirreled away for years in savings accounts. The Nikkei Index rose 23% this year through mid November, but Japanese stocks still trade at just nine times cash flow (earnings plus noncash charges), compared with 12 times cash flow in the U.S., says Peggy McKay, co-manager of Johnson Family International Value fund.

Beneficiaries of Japan's revival should include consumer-oriented companies, such as retailers. One way to own them is through Fidelity Japan Smaller Companies fund (symbol FJSCX; 800-544-8544), which gained an annualized 30% over the past three years to November 1. A safer play is the iShares MSCI Japan Index (EWJ), an exchange-traded fund that owns shares of many of Japan's biggest companies.

European opportunities

In Europe, as in Japan, restructuring has improved corporate profits even as concerns persist about the broader economic picture. "Don't judge Europe by its aging populations and demographic problems," says Iain Clark, manager of Henderson International Opportunities fund. "Focus on companies living in the real world" that are getting down to business. He likes Spain's Banco Santander. The stock (STD, recent price $13), he says, should advance as investors recognize the value of Santander's acquisition of Britain's Abbey National Bank.

Vivian Lewis, editor of Global Investing, a newsletter, recommends midsize European firms that serve local or regional markets and don't face multinational competitors. One example: Sweden's Volvo (VOLVY, $42), now a maker of trucks and heavy equipment following the sale of its auto-making operation to Ford in 1999. The stock, which yields 4%, is "a pure play on the European recovery," she says.

Among mutual funds, two solid choices are T. Rowe Price International Stock (PRITX; 800-638-5660) and Dodge & Cox International Stock (DODFX; 800-621-3979). The former returned an annualized 18% over the past three years, and the latter gained an annualized 31%.

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