1995-96: REVIEW AND OUTLOOK : Tips for Globe-Shopping Investors

A few tips if you’re hunting for foreign-stock mutual funds:

First, foreign stocks are a means of diversification, but given the political, currency and volatility risks in many foreign markets, investment advisors usually recommend that foreign holdings be limited to 20% to 40% of your total stock portfolio. Don’t overdo it.

Second, the dollar’s direction in 1996 may be key to foreign fund performance. If the dollar rises, it will cut into returns Americans earn overseas; if it falls, it will enhance returns. Many mutual funds try to hedge against currency moves, but they aren’t always successful, and sometimes hedging backfires. You should make an effort to understand your fund’s hedging policy.

When buying a foreign stock fund it’s also important to ask whether the manager invests globally (meaning U.S. stocks may be included) or strictly internationally (excluding U.S. stocks).

Although region-specific foreign funds--such as Japan funds or Latin America funds--have sex appeal, they are best used by speculators, many analysts say. Long-term investors should in most cases stick with diversified funds that have the flexibility to invest in the best markets they can find at any given moment.

Morningstar Inc., the independent mutual-fund rating service, includes these diversified foreign funds among its favorites: T. Rowe Price International Stock ([800] 638-5660); Strong International Stock ([800] 368-1030); Templeton Foreign ([800] 292-9293); and EuroPacific Growth ([800] 421-4120).