3 lessons for investing overseas

chart_foreign_funds.gifBy Penelope Wang, senior writer


(Money Magazine) -- Greece, of all places. Who knew you had to worry about what happens in Greece?

In February concerns about the Greek government's deficits -- and then Italy's, and then Spain's -- had global stock markets spooked, and stoked anxieties about the value of the euro.

CDs & Money Market
MMA 0.40%
$10K MMA 0.36%
6 month CD 0.39%
1 yr CD 0.70%
5 yr CD 1.55%

Find personalized rates:
 

Rates provided by Bankrate.com.

U.S. investors took a hit, but it was worse if you had money abroad. The MSCI EAFE index of foreign stocks is down 5.2% so far this year. Europe, it turns out, is a lot like the U.S.: too much debt, too few jobs, cratering real estate, and lots of noisy squabbling over fiscal policy.

Advisers as well as financial gurus like Wharton's Jeremy Siegel have long urged Americans to invest abroad. And people were finally listening: Last year $68 billion flowed into foreign stock funds as money left domestic funds.

Foreign investing is supposed to offer diversification as well as a shot at better growth. Right now it doesn't feel as if you're getting either. So is the new conventional wisdom bunk?

Not exactly. Going abroad makes sense. But to do it right, understand three key lessons from the latest mess.

1. No refuge in a panic

Spreading your bets all over the globe can reduce risk, but perhaps not the way you expect. It doesn't ensure that you'll always have at least one stock fund that's making money; indeed, when crises hit, all stocks, both U.S. and foreign, will usually collapse en masse as investors seek liquidity and safety.

But over the long run, says Rick Ferri, an adviser in Troy, Mich., a stake overseas can still lower your portfolio's volatility while boosting return.

That's partly because you're hedging your exposure to the U.S. dollar. When you invest overseas, you essentially swap dollars for foreign currency. So if the buck drops, the return on your foreign holdings will get an extra boost.

At the same time, foreign markets offer opportunities you can't get at home. China's economy, for example, is expected to expand 10% this year.

2. Europe isn't so foreign

Trouble is, if you buy a typical foreign stock fund, you won't own much of China or other emerging markets. More than 60% of the average foreign portfolio is in Europe, which in many ways is just another branch of the rich, debt-laden consumer economy the U.S. is part of.

And a giant multinational drug company based in Switzerland serves the same markets as a competitor in New York. You don't leave America behind simply by crossing the Atlantic anymore.

Morningstar analyst Gregg Wolper suggests that on top of your core foreign fund you add one that invests in smaller firms -- which are less driven by global trends -- or a fund that buys in emerging markets.

T. Rowe Price International Discovery (PRIDX) is a Money 70 choice for small-caps and midcaps; Vanguard Emerging Markets Stock (VEIEX) covers new markets well. (They're both risky, so keep it to around 10% of your portfolio.) If you prefer to own a single foreign fund, Vanguard Total International Stock Index (VGTSX) is 20% emerging markets.

3. We're innocents abroad

It's obvious but easy to forget: If you invest overseas, your portfolio can be hit by events in countries where you don't follow the news and can't read the language. That makes a selloff even scarier. You'll need to cultivate some emotional detachment, lest you overreact and flee before the long run plays out.

Need to figure out your financial future? Upload your video or Send us an email and tell us why your family needs a money makeover and you could be profiled in an upcoming story in Money Magazine. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.99%4.00%
15 yr fixed3.06%3.10%
5/1 ARM3.20%3.19%
30 yr refi3.99%4.08%
15 yr refi3.07%3.18%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,827.75 12.81 0.07%
Nasdaq 4,787.32 29.07 0.61%
S&P 500 2,072.83 5.80 0.28%
Treasuries 2.23 -0.03 -1.15%
Data as of 11:29pm ET
Company Price Change % Change
Kinder Morgan Inc 42.32 0.00 0.00%
Apple Inc 119.00 0.00 0.00%
Facebook Inc 77.62 1.99 2.63%
Pfizer Inc 31.10 0.00 0.00%
Bank of America Corp... 17.11 0.00 0.00%
Data as of Nov 26

Sections

The European Parliament has voted to break up Google and weaken its dominance across the region. More

Warren called it "hypocritical" for the White House to oppose corporate inversions but nominate a person who has worked in this area. More

Two pilots encountered drones while flying over college football games and another pilot saw one while flying over the Hollywood sign. More

Natalie's Cakes and More has raised $84,000 through GoFundMe after protests trash store. More

Retailers are promising big deals this Black Friday, but are the savings actually worth the shopping mayhem? Test your deal-sniffing skills. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.