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Three Rules for Investing Abroad: Diversify, Diversify, Diversify

No summer doldrums at Global Portfolio. The questions keep on coming.

Reader Doug Gary recently described some of his recent troubles investing overseas:

I'm currently invested in three explicitly international funds: (ARTIX), (PRJPX) and (PRASX). Last year, alas, was a very good year for all three. This year has been tough for the T. Rowe Price funds ... sometimes I wonder if there might be a better way to participate in the potential gains (and very real risks) of international investing..."

Ah, the risks and rewards of international investing -- and investing in general -- in a nutshell. One year you can experience fantastic returns, the next year miserable ones. And sometimes there won't be a significant change in the fundamentals to explain the difference. After all, most of the economies in Asia look pretty strong right now. But last year, as the region was rebounding from the post-financial crisis bottom, Asia saw big returns. That doesn't mean you should try to time international markets. You need to make them a vital part of your portfolio to help diversity risk and take advantage of overseas opportunities.

If I were you, however, I wouldn't complain too loudly. Yes, Asia and Japan have both pretty much stunk this year for investors, but so has everywhere else. Last year -- when Artisan International rose 81%; T. Rowe Price Japan, 113%; and T. Rowe Price New Asia, 100% -- was a fluke. Pray that you don't see those kind of returns for the Asia funds again soon, because they'll most likely happen only after a major market crash. This year, Asian and other international markets have fallen in synch with the tumble in U.S. markets.

Artisan has done well, up 6.5% for the year. That's much better than the 8.3% decline for the foreign stock category. As you mentioned, the two T. Rowe Price funds have been less impressive. The Japan fund is down 11% year to date, but according to Yahoo!, that's better than the average return on Japan equity funds of -18%. The New Asia fund is down 6.22% but outperforms the Asia excluding Japan stock category, which is down 14% this year.

Your email also raises the larger question of what is a good strategy for investing overseas. Several certified financial planners took a stab at that question. Steven Weinstein, a partner in investment advisory services for Arthur Andersen counsels putting 20% to 40% of a portfolio in international. He prefers a sector strategy, over a regional one, in other words investing in broad-based international general equity funds, supplemented with companies listing here or sector-specific international funds, like technology or biotech.

Ben Tobias, a Florida-based financial planner has a more direct problem with the portfolio you've described. "I would never, never be in a Japan fund," he says. "Japan is just too volatile for me."

He prefers the straightforward approach. "You should definitely be in international equities and the best way to be in international equities is through a broad-based mutual fund," he says.

I'm not sure I agree with his analysis of Japan, but I do find it curious you've stuck to Asia to supplement the broader fund. Why not Latin America? Europe? In general, it seems to me the more diversification the better when it comes to international investing. That would include broad-based funds, regional funds, country-specific funds, and an individual stock or two. You never know where the next hot market will be -- or the next frigid one.
David Kurapka's Global Portfolio column appears Mondays, Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at .

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