Get Familiar With Foreign Stocks

Clark, however, warns investors interested in pursuing this two-pronged approach to rebalance their portfolios quarterly, as emerging-markets funds tend to be volatile. He also suggests checking the large-cap fund for the presence of emerging-markets-based companies to avoid overlap, which can be a drag on performance. The typical country or regional breakdown in international large-cap value funds is 63% Europe, 20% Japan, 10% Asia ex-Japan, 4% Canada and 2% Latin America.

Aside from the risk doubling up on emerging markets stocks, investors also need to be cognizant of overlap with regard to their domestic portfolios. A large number of domestic funds have up to 10% of their holdings in international names such as English drug giant GlaxoSmithKline (GSK) or Japanese carmaker Toyota(TM).

"Investors need to keep in mind how their international funds interact with their domestic funds to avoid doubling up," says Morningstar's Rocco.

One way to avoid overlap is to think about sector diversification in your overall asset allocation. That means checking to see how your current portfolio is weighted in terms of sectors before adding a foreign fund. For example, if your portfolio is already loaded up with domestic pharmaceutical stocks, then there is no reason to add a fund teeming with European or Israeli drug companies just because they are based overseas.

Finally, Gary Schatsky, financial adviser with Objectiveadvice.com, says that foreign companies might make some high-quality products -- but that fastidiousness doesn't always translate into better transparency. So beware of possible balance-sheet issues at some of the lesser-known companies overseas, where bookkeeping rules can be less stringent.

"As bad as transparency and accounting problems are over here, its worse in Europe," says Schatsky. "But you still have to be exposed to foreign stocks. No doubt about it."

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