Don't panic over plunge in overseas mutual funds


I'm a psychologist and know I'm way behind in saving for retirement, so I can't afford to lose anything in my 401(k). When I read about international stocks crashing, I looked at my 401(k) and saw that my Dodge & Cox International fund had lost $5,000. Should I pull my money out right away? I have about 40 percent of everything I have in it.

-- C.C., Chicago

It's true that international stocks have been getting battered lately, but that doesn't mean all foreign stocks. Nor does it mean you should dump everything you have invested outside the United States, especially not the Dodge & Cox International fund.

Start by understanding where the dangers exist in mutual funds and compare that with what you have in your 401(k). The serious dangers in the market now, and the scary news stories you've seen, apply to what are called "emerging-market" stocks -- those for companies in developing, less-stable economies, everywhere from Colombia to Russia to Pakistan.

Shareholders in some emerging-market mutual funds lost about a quarter of their money in them in just three weeks in May.

Emerging markets are notorious for big moves. In the last few weeks, an investment in Saudi Arabia has lost 49 percent, Colombia is down 24 percent, and India was off 15 percent, according to Merrill Lynch & Co. emerging-market strategist Michael Hartnett.

A fund such as Dodge & Cox International, however, should neither soar nor plummet based on emerging markets. Yes, it did drop about 9 percent during a couple of weeks in May when investors became nervous about every part of the world, but the fund's managers invest primarily in tame areas, such as France, the Netherlands, Japan and Germany. Only 8.2 percent of the fund is in Latin America, and 7.8 percent is in emerging countries in Asia, according to Morningstar Inc.

This broad investment mixture, known as a diversified international fund, is exactly the type of investment that belongs in 401(k) plans at all times, said financial planner Sue Stevens.

Last year, the Dodge & Cox International fund provided investors a return of 16.8 percent, and this year it's up 11.7 percent despite a couple of rocky weeks in May.

Even with tame international funds, however, losses are possible, as they are in U.S. stock funds. For example, while the U.S. market fell 22 percent in 2002, the Dodge & Cox International fund lost 13 percent.

Having 40 percent invested in the Dodge & Cox International fund, or any other foreign fund, is probably going too far, especially for an investor who is nervous about a drop in the market. Even for the most aggressive and daring investors, Chicago financial planner David Kover doesn't put more than 30 percent of a portfolio into international stocks.

For a moderately conservative investor, Stevens suggests about 20 percent. But international stocks are probably going to be volatile for at least a few more weeks. If you know losses will shake you, you could cut your exposure to 10 percent or 20 percent, she said.

Also, don't just focus on international stocks. Investors are jittery, so you could have some nervous days ahead. Look at your full portfolio and make sure you aren't overexposed to stocks of any kind.

For a person nervous about the recent volatility, Stevens suggests perhaps 20 percent in funds that invest in international stocks, 40 percent in funds that invest in U.S. stocks and the remainder in bonds, CDs and money market accounts.

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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