THERE'S A CERTAIN

swagger that goes along with being an American. We've won the cold war, the Gulf war and...so far...the war on terrorism. Our currency is the international standard by which all others are judged and our companies are the most highly valued and actively traded in the world.

But along with the swagger comes myopia. Like many Americans, I too often fall prey to the fallacy that that world news is American news, world culture is American culture and the world market is the American market.

This Western-centric bias is echoed among the various economists, analysts and taking heads who are paid to pontificate on the state of the world economy. There's a general consensus that whenever the world's economy does turn around, the United States will once again be leading the charge higher.

These days being patriotic isn't just popular, but hip. But as we always like to point out, the purpose of investing is to make money, not make a political statement. And for a number of factors, when it comes to putting new money to work these days, my sights are increasingly set outside U.S. borders.

As we've mentioned before, it is the seemingly risky strategy that's often a better bet than the so-called "safe" alternative. And while they're often written off as unnecessary gambles, it's my belief that foreign investments, specifically those in so-called "emerging markets," are underowned, undervalued and worthy of a place in your portfolio.

The reality is that there are over six billion people on Earth, and a relatively small number, just 286 million, are fortunate enough to be citizens of the U.S. And smart traders have long known it's a big, wide world out there. As recently as the late 1980s and early 1990s, international investments, particularly those in emerging markets, put U.S. markets to shame.

We may have a trademark on the old Stars and Stripes, but the benefits of free-market capitalism are strictly public domain. It's quite possible that the next Microsoft might be started in a Seoul garage instead of a Seattle one. Indeed, Korea's benchmark Kospi Index is up sharply in recent months. And although Russia is far off the screen of most "prudent" U.S. investors, those who said "da" have profited nicely as of late: Russian stock funds gained over 60% in 2001.

Those gains, coming at a time when developed markets were struggling, demonstrate one of the biggest advantages of focusing on emerging markets rather than simply international investments. Most "first world" markets tend to be closely correlated with one another. So when Novellus Systems falls, both Nortel Networks and the Nikkei are likely to follow. By contrast, most emerging markets tend to move independently of those in more developed nations, making them an ideal way to further diversify a portfolio away from General Electric, Pfizer and Cisco Systems you know, the usual suspects.

In the past, we've outlined the benefits of seeking both less popular and less liquid investment opportunities, and with a dozen or so large-cap exceptions, international stocks tend to quality on both grounds. This is precisely what interests me most about international securities: They're usually underowned and undervalued relative to U.S. alternatives.

Roughly 48% of the world's total stock-market capitalization is made up of U.S. stocks. Europe accounts for 32%, the Pacific about 13%. Emerging markets, precisely those which arguably offer the greatest upside potential, check in at a mere 7%.

And while most people are aware that they can invest overseas, only a handful actually do it. According to the Investment Company Institute, only 11% of the $5 trillion invested in U.S.-based equity and bond funds is pledged to international equities. Less than 1% is pledged to international bonds. Even more globally minded institutional investors tend to give the rest of the world short shrift. According to Reuters, U.S.-based global managers hold almost half of their investments in domestic stocks. European global mangers put only one-third of their assets into European stocks, while Japanese global investors allocate a mere 20% to their own country's market.

Depending on the size, of your account, there are a number of ways to consider allocating a portion of your portfolio to emerging markets.

For those buying individual shares, both J.P. Morgan and Bank of New York offer excellent sites devoted to American depositary receipts, or ADRs, which represent the stock of non-U.S. companies. Although the emerging-market ADRs are more thinly traded than those from more developed countries, most still trade at least a few thousand shares a day.

Additionally, the SmartMoney.com Stock Screener lets you screen ADRs.

Several closed-end country funds especially those focused on Southeast Asia and emerging Eastern Europe are promising buys, although the discount to net asset value on most has narrowed since we first discussed them last spring. For those who feel more comfortable buying the more recently introduced exchange-traded funds, there are a number of sector portfolios designed to track emerging markets. The technical standouts among the bunch are iShares MSCI Korea and iShares MSCI Malaysia. Of course, there are a number of excellent open-end mutual funds that focus on emerging markets that investors, particularly those with smaller accounts, should consider. For some ideas, see colleague Dawn Smith's story.

But don't stop with stocks. Bono notwithstanding, the best way to support a fledgling country isn't to forgive its debts, but to buy them. So in addition to adding emerging-market stocks, you'll want to check out a number of the bond mutual funds as well. On the closed-end side, both Templeton Emerging Markets Income fund and Morgan Stanley Global Opportunity Bond fund yield over 10%. Most of the large mutual-fund complexes also offer open-ended mutual funds that invest solely in emerging-market bonds.

Sure, emerging markets are dicey. But remember that for a great part of the last 600 years, even the mighty U.S. was considered an emerging market. When Queen Isabella popped for Christopher Columbus's three ships, she wasn't exactly putting her money in a certificate of deposit. Investing overseas has always carried high risk...and potentially high rewards.

Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund. At the time of writing, his fund had both short and long positions in many of the securities mentioned in the article.