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How Many Foreign Funds Are Too Many?© Sound Mind Investing | November 2009
Q: The best-performing funds in my 401(k) right now are international funds. Should I limit the portion of my portfolio invested in these funds, or just buy the top performers? A: Back in March 2006, we wrote about a "fallback strategy" for investing in a 401(k) with limited fund choices. That approach suggested investing in the top-performing funds, irrespective of which risk category each fund came from. However, we noted one exception in our research: we never allowed more than half of our holdings to be foreign funds. When more than half were foreign, we skipped down the rankings to select domestic fund holdings instead. That exception was included for times such as now, when foreign funds are really soaring. Naturally, you're free to hold more foreign funds if you wish. But recognize that putting 50% of your money in foreign funds is already a considerably higher allocation than our standard Upgrading strategy calls for (20%). Foreign funds may be hot right now, but it's worth remembering that foreign funds weren't the best performers last year — they were the worst! Diversification is similar to guardrails on a highway. Guardrails keep you from going too far to one side or the other. RELATED ARTICLES
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