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Now's the Time to Invest in International Funds

The soaring U.S. stock market makes a strong case for diversifying your retirement portfolio globally. Here’s how.

By Ann C. Logue | April 3, 2013

If you’ve had money in the U.S. stock market this year, you’re probably pretty gleeful. The average stock fund is up more than 10 percent — and that follows a 13 percent rise last year.

By contrast, international stocks have been a snooze lately. The average diversified international stock fund is up just 3.5 percent so far this year.

Why Investing Overseas Is Worth a Look

The combination of sizzling domestic stocks and lackluster foreign ones makes this an opportune time to look into investing some of your retirement money overseas.

(MORE: 4 Stay-Cool Strategies for Today’s Hot Stock Market)

International diversification can help reduce your overall portfolio risk and give you exposure to markets that might perform better than the United States in the near term. "Opportunities are coming up at a faster clip outside the U.S.," says Phil Wagner of Bryn Mawr Trust Company in Bryn Mawr, Pa.

Echoing Wagner, Christine Fahlund, a senior financial planner at T. Rowe Price, recently told Next Avenue blogger Kerry Hannon, “We’re encouraging people to look more internationally.”

Don’t worry about whether this is exactly the right moment to invest internationally, though. It's nearly impossible to gauge the best times to buy and sell.

"We're often our own worst enemy," says Tom McGuigan of Exencial Wealth Advisors in Old Lyme, Conn. He notes that many investors sold their international funds in the 1990s so they could put the money into the U.S. market — just before American stocks tanked and foreign funds took off. 

Allocation Advice From the Pros

How much of your portfolio belongs in international mutual funds or their 401(k) equivalents?

There’s no simple answer.

Wagner's firm usually recommends keeping about a third of your stock holdings in international companies.

Gail MarksJarvis, a syndicated financial columnist and author of Saving for Retirement (Without Living Like a Pauper or Winning the Lottery) is more conservative, generally preferring a weighting of 20 percent. "You're dealing with situations where the information flow is not reliable," she says.

Actively Managed or Index Fund?

When choosing an international fund, you’ll want to decide whether to go with an index fund or one that's actively managed, which means there’s a professional or a team deciding which stocks to buy and sell. An international index fund buys a basket of foreign stocks tracking a particular global index and holds onto them.

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MarksJarvis, McGuigan and Wagner prefer actively managed mutual funds over index funds for most international investors.

"If you just buy an index fund, there's no one trying to pick winning countries or winning stocks — or working to avoid losing countries and stocks," MarksJarvis says. (If you prefer an index fund because you don’t want to bet on a pro making smart investing moves, read the Next Avenue article, "How to Choose the Right Index Funds and ETFs.")

How to Shop for an International Fund

Wagner recommends looking for broadly diversified actively managed international funds with low turnover (that means they don’t buy and sell shares frequently). A low turnover fund keeps down trading costs and taxes you’d owe on capital gain distributions.

The Morningstar.com site provides links that let you see how every international fund has performed over a specific period, from one month to five years. You can also learn about the fund’s expenses, turnover rate, asset allocation and largest stock holdings and read the prospectus.

(MORE: Rebalancing Is Genius Investing)

MarksJarvis says it’s important to stick with managers with at least a five- to 10-year track record of matching or beating their benchmark index's performance; you can typically find that information in the fund’s performance breakdown or on Morningstar’s site.

The global financial crisis, MarksJarvis says, has created a golden opportunity to see how well particular international funds have done in a really bad market and then in a recovering one.
 
Ann C. Logue is the author of books including Emerging Markets for Dummies and has written for Next Avenue, Barron’s and Entrepreneur.