Many investors are referring to the years 2000-2009 as the “lost decade.” And for good reason. A dollar invested in Standard & Poor’s 500 Index stocks on Dec. 31, 1999, was worth approximately 78 cents ten years later. In fact, it was the worst decade in history for U.S. equity investors, worse than the 1850s and 1930s.

In the first decade of the 21st century, the S&P 500 compounded at -1% per year, or -3.6% below inflation. By comparison, in the 1850s, it compounded at 0.5% and in the 1930s by -0.1%.

Two lessons for investors here: First, following the “hot stocks” of yesteryear is a surefire way to fail. Second, investing only in U.S. companies is no longer an option.

In 2000, the most widely recommended stocks for the coming decade were America Online, Cisco Systems, Qualcomm, MCI WorldCom, Lucent Technology and Texas Instruments, Brett Arends wrote in the Wall Street Journal.

This list merely gives us a snapshot of the popular stocks of late 1999, doesn’t it? It doesn’t say anything about how the decade might change. “Any people who invested in that portfolio have lost about two-thirds of their money,” Arends wrote. “The average stock picked at random was up 3%, including dividends.”

Arends warns investors against following the Wall Street consensus. “The most powerful and dangerous force on Wall Street is the herd instinct,” he writes. “Much of the stock-market community is still just a marketing machine that happens to sell investments, the way, say, a drugstore like CVS sells pills.”

The second lesson is that the U.S. is losing market share in a global economy. Investing only domestically is not an option going forward.

In the U.S., the last decade began with the bursting of the Internet bubble and ended when the giant housing and credit market bubble burst. Of course, the Great Recession was a worldwide phenomenon. But the U.S. is stalled in recession and severe unemployment, hovering around 10%, whereas Asia bounced back.

For example, Australia’s unemployment rate hit a high of 5.8% in August and was down to 5.3% in January. The Australian central bank has raised interest rates 3 times, most recently to 3.75%, to put the brakes on the economy while the Fed holds the U.S. rate at around zero percent. And the U.S. economy still doesn’t grow.

Some investors argue that everything is fixed now; that the bull market will continue. Some of them say that it’s even better than that: the stock market returns 10% a year, on average, over time. Doesn’t that mean we have a lot of good news and good returns ahead of us?

Perhaps not. Not all investors lost money in the decade just ended. Three asset classes enjoyed double digit returns: emerging market bonds, 10.9% annual return, REITS, 10.2% and emerging market stocks, 10.1%, according to data from investment research firm, Research Affiliates.

Barron’s reports that 2009’s fourth-quarter returns for 8,047 U.S. diversified equity funds, representing $3 trillion in assets, averaged 5.03%. The S&P 500 returned 6.04%. Not bad.

But by far the best performance was captured by emerging markets funds, up 7.59% for the quarter and 75.74% for the year according to the Barron’s report. Americans poured a record $64 billion into foreign mutual funds, a little more than half of that allotted to emerging markets. There are now 514 emerging-market stock funds and 103 emerging market bonds funds.

I’m not going to suggest that you put your money into yesterday’s hot performer. But the argument for more and broader diversification is stronger than ever now. And most Americans—including institutional investors—still believe that America is the best place for their investment dollars.

Consider this: The average U.S. institutional portfolio has about 70% of assets in U.S.-based funds and 30% in international funds. Until recently, Avi Nachmany, director of research at Strategic Insight, suggested U.S. investors maintain a 50/50 U.S./foreign split. He now suggests 1/3 U.S., 1/3 overseas developed markets and 1/3 in emerging markets. Foreign investments, of course, provide dollar diversification as well as geographic diversification.

No one should run out and buy an emerging market fund tomorrow. But I think most investors should begin to examine their portfolios to see what percentage is large U.S. company stocks. And then most of us should study how to create a more diversified portfolio.