International stock funds have been big winners recently, according to Morningstar:
* For the last five years (through November 2006), foreign stock funds have beaten domestic stock funds, 15.68 percent to 7.30 percent per year.
* For the last three years, international funds have led the way, 20.98 percent to 11.29 percent
* In the latest 12 months, foreign funds’ edge has been 27.42 percent to 12.08 percent
Going forward, investors face the risk that international funds will back off after years of outperformance. To reduce that risk, diversify your overseas holdings.
You might, for example, start by investing in funds that hold foreign large companies, which may do comparatively well if the global economy slows down. You could buy a large-cap foreign fund that holds growth stocks and one that owns large-cap value stocks.
Another strategy is to start with a fund owning large companies in the developed markets of Europe and Asia Then you can add a foreign small-company fund or a fund that owns companies based in emerging markets. If your portfolio is large enough, you might put together an offshore portfolio containing a large-company fund, a small-company fund, and an emerging markets fund.
