The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 53. International Investing

THERE WAS A TIME WHEN U.S. stocks represented two-thirds of the value of all the stocks trading in the world. By the end of the twentieth century, though, the numbers flip-flopped, and two-thirds of the value of all stocks was to be found outside the United States, so experts argued that the best way to diversify and cut risk while increasing return was to invest 30 to 40 percent of a U.S. stock portfolio overseas; that way, one investment will zig as the other zags. Many Americans began to invest in foreign stocks both to diversify their holdings and to create potential for portfolio.

But can you pick foreign stocks? How about stocks in India or Australia? I certainly can't. Nor can most portfolio managers. This is where exchange-traded funds (ETF) come in handy. These funds, which are just now being introduced in 401(k) plans, allow investors to pick a particular sector of the economy or a specific geographical region or both.

You can buy an index of foreign stocks just as you buy an index of U.S. stocks. One way to compare investment returns is to look at the Standard & Poor's Index of 500 Stocks (the ETF is SPY) and the EAFE or Europe, Australasia and Far East Index, as a proxy for stocks in developed countries other than the United States. (The iShares MSCI EAFE index is EFA.) Many different ETFs are available that provide indexes for emerging markets such as Egypt, India, Israel, Chile, and South Africa.

The iShares ETFs, managed by Barclays ...