Now that the dollar has at last given off signs of stabilizing—and possibly recovering some of its foreign exchange value—investors have begun to reconsider their portfolio exposure overseas. Certainly, circumstances give reasons to doubt the continuation of dollar declines that for years have offered a tremendous tailwind to overseas investment returns. This change in currency prospects might justifiably affect some portfolio decisions. But fundamentally, currency should never be the only consideration in a decision on foreign investing. Even if, as it seems, the dollar's long decline has ended, investors still have cause to maintain at least some overseas exposure.

Of course, after the behavior of the last few years, it would be foolhardy indeed to expect the immediate future to bring similar gains to international investments. Over the two and a half years that ended May 31, the broad-based index of Europe, Australia and Far East (EAFE) equities returned 37.9%, far more than the S&P 500's 18.2% return over the same period. Of those foreign gains, over two-thirds reflected the dollar's decline against the euro, sterling, the Australian dollar and the assortment of Far East currencies used in the index. The balance of these returns reflected the basic movements of the domestic equity markets and their dividends. Not only has the global situation changed so that these equities are unlikely to give such handsome returns going forward, but the dollar is unlikely to continue falling at the pace it averaged during these past two and a half years. Indeed, since the high-priced euro already threatens Europe with an export-based recession, there is good reason to expect the dollar to stabilize, if not rise, against the European currency.

But a suggestion that the future will differ from the past should not serve as reason to abandon international investing. Quite aside from the currency outlook, many of these markets offer both good value and good growth prospects. Asia, for example, outside China and Japan, should grow since China is a major market for those economies.

To be sure, China is making efforts to slow its pace of growth, but the growth impetus will almost certainly remain strong. Meanwhile, with Beijing likely to allow more yuan appreciation against the dollar, there is a chance of some appreciation in other Asian currencies, loosely linked as they are to the yuan. Though growth prospects in Japan remain problematic, that market remains cheap. And there are tremendous opportunities in Japan for a stock picker who can find companies that have reformed their financial and business models but which remain inexpensive because of the generally depressed nature of the overall Japanese equity market. Meanwhile, in Europe, reasonable questions surround growth prospects, but potential in some Eastern and Central European economies remain high. And, in Western Europe it remains possible to find good value.

Even apart from such valuation and growth prospects, there is ample reason to maintain at least some overseas exposure. One, of course, is the ongoing need for diversification, the quintessential portfolio consideration. Because not all markets move together, foreign exposure can help protect a portfolio during difficult times in the domestic American market. Although many markets have a lot of common movement—as shown by the correlation matrix above—that proportional relationship is far from complete and the differences can help protect a portfolio. International exposure can also increase an investor's so-called opportunity set, the pool of securities from which an active manager can draw promising holdings. As broad and large as the American market is, it still constitutes less than half the equity investment potential in the world. Actually, a strict American focus can almost preclude exposure in some industries, such as shipbuilding or large-scale engineering. To gain exposure to these and other critical areas, an investor has to seek foreign exposure.

Though it looks as if foreign investing will lose the tailwind it had enjoyed from dollar declines against other currencies, these markets still deserve a place in the portfolios of most American investors. The international pool of securities diversifies a portfolio by moving differently than the domestic pool does, at least to some extent. Whatever happens to the dollar, such investments still offer special growth and value opportunities that do not necessarily reside in domestic markets, and exposures that are almost impossible to achieve in a purely domestic portfolio.

Milton Ezrati is the senior economic strategist at Lord Abbett and is affiliated with the Center on Economic Growth in the Department of Economics at The State University of New York at Buffalo. He is a 35-year Wall Street veteran and a well-known expert on a range of global and domestic financial issues.