From the September 2008 issue of Boomer Market Advisor • Subscribe!

Five steps to overseas investing

In keeping with this month's theme (and to ensure your client doesn't chase performance overseas) we offer the following five steps to better international investing, courtesy of Morningstar's Bill Rocco.

Keep your near-term expectations in check
The first thing investors should do, according to Rocco, is make sure that they have reasonable expectations for the short- to mid-term prospects of their international funds. The big absolute and superior relative gains that the various types of overseas offerings have posted in recent years simply aren't sustainable for valuation and other reasons. If you're adding to your international exposure now, plan to have at least a 10-year time horizon.

Confirm that you don't have too much overseas exposure
Rocco suggests that, given the superior performance of overseas offerings, investors should check to see whether their overall foreign exposure at present exceeds the upper end of their international-allocation range. They should be sure to take a close look at their world-stock, specialty, and domestic-equity holdings while doing so.

Check your smaller-cap and emerging-markets stakes, too
But investors should do more than tally up their overall international exposure, Rocco notes. They should also check to make sure that they don't have more foreign smaller-cap or emerging-markets exposure than makes sense. Mid- and small-cap names have been at the forefront of the international rally and emerging-markets stocks have led the way, so funds that are dedicated to such issues may very well have appreciated beyond your target-allocation ranges for these asset classes.

Don't forget about conservative foreign funds
Investors who need to rebalance their overseas portfolios away from foreign smaller-cap or emerging-markets funds - or who happen to need more overall foreign exposure - should be sure to consider more-conservative foreign large-cap vehicles, he says. Although more-aggressive foreign large-cap funds with sizable smaller-cap or emerging-markets stakes have tended to outperform in recent years, that won't always be the case, and such funds are likely to incur real damage the next time racier overseas stocks suffer a prolonged downturn.

Factor in taxes
Finally, investors should be sure they factor in tax considerations as they re-evaluate the international portions of their portfolios and make any necessary adjustments. Those who need to reduce their overall international exposure or who need to lower their supplemental foreign exposure should consider scaling back in their tax-sheltered accounts first. And if they must rebalance using their taxable accounts, they should remember that it often is preferable to rebalance by making future contributions to non-international funds rather than by selling existing international holdings.

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