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Few Folks Invest Retirement Cash in Overseas Market
401(k)s Shun Foreign Stocks

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Net assets of global and international-focused mutual funds
Although the amount of (401) k retirement money invested in global and international mutual funds has grown over the years, overseas funds still make up a small percentage of the overall retirement money. (Marco Doelling/ABCNEWS.com)

By George Mannes
ABCNEWS.com from TheStreet.com
Oct. 5 — Though global economic woes have hurt stocks domestically as well as overseas, they’ve had a surprisingly little direct effect on one very important part of the market—401(k) plans.
     It’s not for lack of encouragement. After all, investment professionals commonly recommend overseas stocks and mutual funds for people’s investment portfolios. The opportunities for investing overseas as part of a retirement plan have skyrocketed in recent years. But the 25 million American workers who save and invest for retirement in employer-sponsored 401(k) plans are shunning world equity funds and sticking closer to home.
     Of course, U.S. companies aren’t immune to the global slowdown, since many have seen their earnings cut by slowing sales in other countries. But investors worry most about the hits taken by companies based outside of the United States.
    “They’re feeling nervous about all of the markets right now,” Sharon Rich says about her clients at the Womoney financial planning service in Belmont, Mass. “The international [market] brings up even more anxiety.”

Not Going Global
Of the estimated $985 billion worth of assets in 401(k) plans last year, only 4.6 percent were invested in international or global funds, according to a survey from Spectrem Group and Access Research. (Funds labeled “global” invest in U.S. companies as well as those abroad.)
    According to the Profit Sharing/401(k) Council of America, a nonprofit industry trade group, the size of foreign investments is even smaller: Less than 2 percent of 401(k) assets are invested in foreign markets, says president David Wray. That’s more than what 401(k) participants have in, say, real estate, but it’s a fraction, on average, of what people have in their own company’s stock or in U.S. equity funds. “If you look where the money is, it’s probably in the 500 largest companies,” Wray says.
     One reason for this limited direct exposure, Wray says, is that companies that sponsor 401(k) plans were late to the international investing game.
    Last year, 67.4 percent of 401(k) plans gave employees the option of investing in an international or global fund. Six years earlier, only 5.9 percent of plans gave investors such a choice.
    As it turns out, U.S. investors have generally done well by staying local over the past 10 years.

Major Differences
Although foreign markets did well in 1993 and 1994, U.S. stocks have generally outperformed foreign markets over the past decade, advisers. And the differences have been particularly cruel over the past year, especially when compared to the S&P 500 stock index.
    Since last October, the S&P is up 4.3 percent, while a selection of foreign funds tracked by Lipper Analytical Services was down 21.3 percent. Funds focused on so-called emerging markets, such as Russia, Brazil and Thailand, fell more than 49 percent.
    Despite performance like these, investment advisers insist that foreign funds are an essential part of a well-balanced portfolio.
     “We generally recommend that a third of all equity investments be international,” says Matt Kammerzell, a consultant with Ibbotson Associates, a company that consults with financial planners and investment advisers on allocating their clients’ assets. But because of the added risk, no more than 10 percent of a portfolio should be in emerging markets, says Kammerzell—not even for the most aggressive investors.
    Investing overseas is a good idea, says Kammerzell, because of its potential returns and because foreign markets generally behave independent of the U.S. market. But he acknowledges that Ibbotson’s clients are having difficulties recently convincing individual investors to commit to foreign markets.
     “There are certainly a lot of individual investors that are afraid of investing in international markets,” he says.
    Other investment strategists are counseling clients against either selling in a panic or avoiding foreign markets altogether until they recover.
     “If you want these long term returns, you’ve got to stay with it,” says Peter Brown, a partner in Evensky, Brown, Katz & Levitt, an investment advisory firm in Coral Gables, Fla. “If you wait for the markets to recover, you’re going to lose a large part of the gain.”

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