Party's over for investors in foreign stocks
Late arrivals stung as values plunge after five years of solid growth.
Foreign stocks had been the shining stars in many U.S. investors' portfolios from 2003 through 2007. This year, they're beginning to look like black holes.
With the global economic outlook fading and the dollar rebounding, Americans' foreign holdings are suffering a double-whammy. If you haven't checked your portfolio lately, you may be in for a shock.
The average foreign stock mutual fund has plunged 18.1% year to date, according to Morningstar Inc. That's more than double the 8.6% decline of the average U.S. stock fund.
The heavy losses overseas pose another difficult test for weary investors already hurt by declines in other corners of their portfolios and by falling home prices.
In particular, this turnabout is a blow to Americans who were late to begin riding the foreign-investing wave.
In 2006 and 2007 combined, U.S. investors pumped a net $404 billion into foreign mutual funds, according to Financial Research Corp. That was more than three times the net $125 billion invested in U.S. stock funds in the period.
"People jump on the bandwagon and think these trends last forever, but they don't," said John Kleponis, senior portfolio manager at financial advisor Yosemite Capital Management in Tustin.
As usual in times like this, advisors are trying to keep their clients focused on the long-term -- and on the benefits, over time, of maintaining a diversified portfolio that includes foreign and domestic investments.
Underpinned by brisk economic growth overseas, foreign stock funds on average generated bigger gains than the typical U.S. stock fund every year since 2002, according to Morningstar.
The story was too compelling to ignore: China's explosive growth was powering economies across Asia; Brazil and other commodity exporters were reaping rising prices for their raw materials; and in Europe, economies such as Spain were enjoying housing-centered booms.
What's more, the sinking dollar added a windfall to U.S. investors' foreign-stock returns. As the dollar dropped, securities denominated in rising foreign currencies were worth more when translated into dollars.
In the five years ended last Dec. 31, for example, Germany's DAX stock index rose 179% as measured in euros. But measured in dollars the gain was 292%. That far outpaced the 67% rise in the U.S. Standard & Poor's 500 index.
