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Foreign stocks' big rise and fall

November 04, 2008|Tom Petruno | Petruno is a Times staff writer.

Foreign stocks were a tremendous source of wealth generation for U.S. investors from 2003 through 2007. They were the best-performing asset in many people's 401(k) plans.

But most of those gains now have disappeared, wiped out by the global market meltdown of the last few months.

The accompanying chart puts the 2003-07 rally -- and this year's plunge -- in perspective. It gives a sense of how much foreign markets would have to rebound just to get back to their 2007 peaks.

The chart shows the iShares MSCI EAFE exchange-traded stock fund, which trades on the New York Stock Exchange and invests in big-name stocks of developed countries outside the U.S. The fund's shares jumped from $33 at the end of 2002 to $78.50 at the end of last year, a 138% advance. A $10,000 initial investment would have risen to $23,786 in that period, powered by strong growth in many foreign economies and by the rising value of most foreign currencies against the dollar.

The fund's gain in that period was more than twice the advance of the U.S. Standard & Poor's 500 index. No wonder Americans poured record sums into foreign stock mutual funds in those years.

But in this year's meltdown, many of the decade's biggest market winners collapsed. Investors who were reluctant to take out any of their profits on the way up suddenly crowded for the exits at once -- with a predictable outcome.

At its recent five-year low reached Oct. 27, the EAFE fund's share price was back to $37.51, a net gain of just 14% since 2002.

Still, that was better than the 3.5% net price decline of the S&P 500 in that period.

The news has been better in the last week as most stock markets worldwide have rebounded from their lows. The EAFE fund ended Monday at $44.75, a jump of nearly 19% in five sessions.

But it would have to rise 92% from here to get back to its record high of $86.10 a share set last year. And the head wind of the dollar's surprising strength, if it keeps up, won't make that task any easier.

Remember, though: If foreign diversification made sense five years ago, the case is even stronger today.

A lot of stocks around the globe now seem cheap if you can truly afford to look out as far as 10 years. The challenge will be getting through the next six to 12 months without being frightened into pulling the plug at these depressed levels.


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