A Market Where Frustration Trumps Hope

Betraying hopes for a rebound from

last week's trashing, but belying fears of a meltdown, major averages sputtered lower again today.

Once as high as 9937.09, the

Dow Jones Industrial Average

closed down 0.9% to 9819.87, its lowest close since Feb. 19. The

S&P 500

closed down 1% to 1065.45, barreling through its Feb. 20 intraday low of 1074.36 in the process. The

Nasdaq Composite

shed 0.4% to 1656.93 after trading as high as 1678.56 and as low as 1640.97.

Rather than falling on any company-specific story, the market succumbed to continued concerns about corporate earnings and the economy's path.

Tyco International

(TYC)

,

AOL Time Warner

(AOL)

and

WorldCom

(WCOM)

were among the names trading at 52-week lows intraday today as investors continued to abandon many erstwhile big-cap favorites.

3M

(MMM) - Get Report

was the biggest drag on the Dow, falling 1.4% after

Rohm & Hass

(ROH)

became the latest chemical concern to warn about its second-quarter outlook. Rohm & Hass shares fell 3.1%.

Although it recovered from intraday lows, recent weakness in the dollar also weighed on U.S. equity proxies, as

discussed earlier.

This latest day of disappointing action got me thinking of a recent conversation with a friend who (like me) has an infant baby girl. This friend (also like me) was saving for a house before concluding the Bay area housing market was still too crazy. He wanted to know where he should put that money and wondered if the stock market was "safe" yet.

Heavens no

, I told him, suggesting that, in the aftermath of the greatest equity bubble in history, the U.S. stock market is going to remain a frustrating place for most investors for several years to come.

While not widely held (or at least discussed in polite company), that's not a unique view and shouldn't be news to faithful readers of this column: I wrote as much back on

Sept. 28 and have since tried to make the case that true long-term investors should be wary of confusing short-term rallies with the onset of a long-term bull market.

With the caveat that I'm not a financial adviser, I suggested my friend look overseas, noting that several major brokerage firms recently

raised their recommended exposure to Japan. Furthermore, I argued the dollar's recent weakness,

gold's ascendancy and geopolitical events hint that the U.S.'s run as the prime destination for the world's investors may be coming to an end.

Somewhat surprisingly, my friend had reached a similar conclusion and repeated his question:

So, where should I put my money?

The Ugly American

With that question and conversation in my head, I recently paid a visit to the international equity strategy group at Barclays Global Investors in San Francisco, which is lead by Robert Ginis.

With over $800 billion under management, Barclays Global is the world's largest institutional asset manager. Having helped pioneer the movement toward indexed management in the early 1970s, the firm is not known for making bold calls or market bets. (A Barclays executive once called the firm the "designated driver" of the financial markets.)

Therefore, it wasn't surprising that the message from Ginis and his associates was that investing in international markets offers investors "long-term benefits of diversification." (Excited yet?)

Binu George, a principal in Barclays' international equities group, recalled that many investors used a "scatter-gun" approach to international investing in the mid-1990s, similar to the style of many tech investors in the late 1990s. Then came the 1997 devaluation of the Thai bhat, which precipitated a huge crisis in emerging markets from Southeast Asia to Latin America to Russia. (Remember "contagion?") The crisis had devastating consequences for Long Term Capital Management, and the threat its failure posed to our financial system's health scared a lot of investors away from the international arena.

Still, emerging markets had a "huge rebound" in the fourth quarter of 1998, and 1999 was a "good year," Binu recalled. But then the sector "got caught in the

tech and telecom bubble," and when that burst, emerging markets became "unloved" and "out of favor" once again.

The bottom line is the international arena remains woefully underrepresented in most investors' portfolios. As of March 31, domestic stock funds had total assets of $2.9 trillion vs. $402 billion for international stock funds -- including precious metals funds, according to Morningstar.

But given the U.S. stock market's recent performance, investors are probably regretting their aversion to all things foreign. Although their first-quarter outperformance was most noteworthy, many international stock sectors have outperformed domestic stock funds, save small-cap value and real estate, for the past year, according to

Morningstar.

For instance, precious-metals funds had an average total return of 65.2% in the last 12 months (better than any domestic stock group), followed by 14.1% for emerging markets, 10.5% for Asia excluding Japan, and 6.1% for Latin America (yes, despite the unrest in Argentina and Venezuela). Even emerging-market bond funds have total returns exceeding 20% over the past year, nearly matching the returns of small-cap value equity funds. Since bonds often foretell the fate of equities, that performance suggests emerging-market stocks might have more room to rally.

For retail investors seeking exposure to international markets, Barclays offers 33 internationally focused

iShares, index funds that trade like stocks, with assets of more than $4 billion. In addition to alleviating investors of the burden of having to select specific stocks in international markets, the iShares have much lower expense ratios than the average international mutual fund, noted Feng Ding, a senior portfolio manager at Barclays.

In terms of how much to allocate to international markets, Ginis noted that most institutions have 10% to 20% of assets in overseas markets (vs. 2% in the late 1960s) with roughly 65% in developed economies and 35% in emerging markets.

As for where to go, Ginis advised avoiding "things that have run up the most" short-term such as Thailand, and noted "China hasn't participated" in the recent gains in Asia. Of course, Barclays takes a long-term approach and its index funds are designed to mimic the weighting of the various Morgan Stanley Capital International (

MSCI) benchmarks.

"At the edges you can make bets on riskier areas, but for the core part of your portfolio, you'd want relatively wide exposure," George suggested.

That's good advice for those looking to make an initial foray into overseas markets, and for those who've realized diversification isn't a dirty word or boring concept but an absolute necessity.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.