You might consider investing half at home, half abroad

December 23, 2007|By Gail MarksJarvis | Gail MarksJarvis,Tribune Media Services

You suggest in your book that a person in his 40s could invest 26 percent of a 401(k) in international stock mutual funds. In a column in November, you warned people about emerging market funds. Do you still feel that 26 percent in international stock funds is the right exposure? I have about 30 percent of my 401(k) in American Funds EuroPacific Growth.

- M.A., via the Internet

Investing about a quarter of a 401(k) in international funds makes sense.

For a 40-year-old, financial planners might divide up 401(k) money roughly like this: 20 percent in bonds, 26 percent in international stock funds, 40 percent in U.S. large-cap stock funds and 7 percent each in mid-cap and small-cap funds.

The 26 percent, however, is a ballpark number.

Here's how it comes about: Roughly speaking, U.S. stocks make up about half of the world's market value. Because your objective as an investor is to partake in the world economy, you might think you should invest half your savings at home and half abroad.

There would be nothing wrong with doing that. But financial advisers tend to favor their home turf because they fear investors will become more nervous when a distant stock market declines. Because investing abroad is relatively new for many investors, and because foreign funds have been volatile, the thinking is that investors should cut back somewhat on their exposure to other countries.

So, in a rather subjective manner, many advisers simply arrive at foreign exposure of about 20 to 30 percent.

Lately, many investors have been attracted to larger portions because international funds have been tremendous winners. If you had money in the average fund that invested throughout the world, you would have averaged a 23 percent gain for each of the past five years, according to Lipper Inc. With the average fund that invested in U.S. stocks, the annual return during the five years would have been about 13 percent.

One reason international funds have been such strong performers has been that areas such as China, India and Brazil have been on a tremendous growth spurt. Latin American funds have given investors an average annual return of 49 percent during the past five years. With China funds, it's 35 percent.

The U.S. dollar has been weakening, and that matters when you invest abroad and convert the money you have made into dollars.

The Dow Jones Euro Stoxx index, which tracks how 50 large European companies have fared, is up only 4.4 percent this year in euros. But if you invested in dollars, you would have increased your money about 13.8 percent. In Brazil, you would have earned 38 percent this year in the local currency, but 64 percent in dollars.

Compare that with the Dow Jones industrial average. At home, with your dollars, you would have earned about 6 percent this year.

Will the oversized returns abroad continue? That depends on whether other countries avoid the economic slowdown the U.S. is facing, or whether they lose ground as U.S. customers buy less from abroad. It also depends on whether the dollar weakens or strengthens, which is anyone's guess. If the dollar strengthens, you could receive lower returns abroad than at home.

So what do you do?

You are probably on the right track, provided you won't panic if you see one of your funds turn down. Financial advisers say it's tough for anyone to guess what investments will be hot and what funds will be cold as market cycles occur.

So they tell investors not to try to guess. They simply suggest deciding on an allocation in international stocks and sticking with it - perhaps keeping 20 percent to 30 percent of an investment portfolio in international markets, and no more than a third of that in what are called emerging markets. They are the most volatile areas of the globe - countries like China, India, Venezuela and Pakistan.

In the past, emerging market funds have dropped 20 percent or more in relatively short periods of time. And analysts are warning investors not to get carried away by the 40 percent return investors have received in emerging market mutual funds over the past 52 weeks. Emerging markets have been very hot for several years, and that often means a downturn may be coming. The hottest stocks tend to fall the hardest.

With a diversified fund such as the EuroPacific Growth fund, you don't have to be as worried about emerging markets as you would have to be if you were in a fund that invested only in those volatile markets.

Your fund employs managers who shop the world for the best companies at reasonable prices. They buy the stocks they think will keep climbing, based on economic conditions in other countries and the strength of the individual companies. They avoid stocks that they think might decline and cause your mutual fund to become a loser.

According to the most recent report on the fund at, about a third of your fund's money is invested in emerging markets. If investors are worried, it's worthwhile to see where their diversified international fund has been investing.

If your fund has been a tremendous grower, it might be because it is overindulging in the riskiest markets. Anyone can check out what their fund is holding by going to, typing in the name of their fund in the box on the upper left, and then clicking on "portfolio" on the left side of the page. As you scroll toward the bottom you will see the areas of the globe where international funds invest.

Gail MarksJarvis writes for Tribune Media Services. You can leave a message for her at 312-222-4264.

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