By April 2011, U.S. investors had poured $1.4 trillion into funds that primarily buy stocks of foreign companies, according to Morningstar Fund Flow Data.
What's the attraction? Alluring returns, for one. Over the trailing 10 years through the first quarter of 2011, international stock funds have returned 7.45% per year on average, versus 5% for domestic stock funds, and only 3.3% for the S&P 500. What's more, foreign investing offers sought-after diversification. As we discussed in Lesson 301: Why Diversify?, if you own a variety of investments, chances are you'll always have a hand in something that's performing well.
Unless you understand how to evaluate these funds, though, investing abroad can be pretty harrowing. The key to smart foreign-fund investing comes down to looking beyond returns and Morningstar ratings and understanding how your fund invests. By doing so, you will be able to set reasonable expectations for the investment and uncover its hidden risks—and avoid surprises. Start by asking the following two questions. You can find most of the answers to these questions on the Morningstar Fund Report, on the fund family's Web site, or in the fund's shareholder report.
Does the Fund Own Emerging-Markets Stocks? >>