The other day the WSJ [1] posted news that Citigroup (NYSE: C [2]) is recommending clients allocate 55% of their portfolios to foreign stocks. CNBC just had a segment where one commentator said not a bad idea, foreign assets are much cheaper than they were. The other guest thinks Citi is wrong.

There seems to be two main arguments for this from the article. One was that the US now takes up a smaller portion of the global market cap and the other was that a better risk adjusted return might be available with heavier foreign exposure.

Both points are probably true.

I would also add emphasis to the notion that after a decade long round trip to nowhere the US' prospects might actually be worse than they were in 2000. You can decide for yourself whether you agree with that sentiment or not but if you do then you have to consider increasing your foreign exposure if you have not already done so.

One crucial point about how not to do this is with broad-based funds. Funds like iShares MSCI EAFE (NYSE: EFA [3]) tend to have the highest correlation to the US of any type for foreign investment. This is because the attributes of the underlying countries get blended away. I am big believer in country selection as a way to add value to a portfolio over the entire stock market cycle.

Foreign markets have their own bear markets and it is true that correlations go up during bears but, again, over the entire cycle, the benefits become far more obvious.