Disappearing act: Those huge 2003-07 foreign stock gains

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Foreign stocks were a tremendous source of wealth generation for U.S. investors from 2003 through 2007. They were the best-performing asset in many people’s 401(k) plans.

But most of those gains now have disappeared, wiped out by the global market meltdown of the last few months.

The chart I’ve posted here puts the 2003-07 rally -- and this year’s plunge -- in perspective. It gives a sense of how much foreign markets would have to rebound just to get back to their 2007 peaks.

The chart shows the iShares MSCI EAFE exchange-traded stock fund on the New York Stock Exchange. The fund invests in big-name stocks of developed countries outside the U.S.

The share price of the EAFE fund jumped from $33 at the end of 2002 to $78.50 at the end of last year, a 138% advance. A $10,000 initial investment would have risen to $23,786 in that period, powered by strong economic growth in many foreign economies and by the rising value of most foreign currencies against the dollar.

The fund’s gain from 2003-07 was more than twice the advance of the U.S. Standard & Poor’s 500 index. No wonder Americans poured record sums into foreign stock mutual funds in those years.

But in this year’s meltdown, many of the decade’s biggest market winners collapsed. Investors who were reluctant to take out any of their profits on the way up suddenly crowded for the exits at once -- with a predictable outcome.

At its recent five-year low reached last Monday (Oct. 27), the EAFE fund’s share price was back to $37.51, a net gain of just 14% since 2002.

Still, that was better than the 3.5% net price decline of the S&P 500 in that period.

The news got better last week: Most stock markets worldwide rebounded from Monday’s lows to finish the week sharply higher. The EAFE fund ended Friday at $44.57, a jump of nearly 19% in four sessions.

But it would have to rise 93% from here to get back to the record high of $86.10 a share reached last year. And the headwind of the dollar’s surprising strength won’t make that task any easier.

Remember, though: If you’ve invested in foreign shares via regular contributions to a 401(k), you were ‘averaging-in’ during the boom years -- and you’re doing the same during this bust. And if foreign diversification made sense five years ago, the case is even stronger today.

A lot of stocks around the globe now seem cheap if you can truly afford to look out as far as 10 years. The challenge will be getting through the next six to 12 months without being frightened into pulling the plug at these depressed levels.