Foreign stocks again proving toxic for U.S. investors

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Many Americans have turned their backs on foreign stocks this year. Those who did have saved themselves from worse pain in their portfolios.

The double-whammy of sinking foreign markets and a surging dollar has made for miserable returns for U.S. investors in many foreign-stock mutual funds -- compounding last year’s heavy losses.

The trend worsened Tuesday after credit-rating firm Moody’s Investors Service warned of rising loan woes for Eastern European banks, which Moody’s said would mean more trouble for the Western European parents of those banks.

Eastern Europe ‘looks to be the latest shoe to drop in the global financial crisis,’ said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.

Moody’s warning triggered sharp sell-offs in stock markets across Eastern and Western Europe. The Polish market plunged 6.6%, Austria’s main market index sank 7.1%, and the French market lost 2.9%.

The report also severely undercut the value of the euro, which tumbled from $1.28 on Monday to $1.258 -- near the two-year low reached Nov. 20.

A falling euro devalues European securities owned by U.S. investors. To illustrate: The German market is down 12.3% this year in euros, but is down 20.9% measured in dollars. The U.S. Standard & Poor’s 500 index, by contrast, is down 12.6%.

The picture is mixed in Asia. Measured in dollars, the Japanese market is down 16% this year and Australia’s market is off 18%. But China, Hong Kong and Taiwan have been faring better than Wall Street.

In your 401(k), these numbers are likely to be most relevant: The average foreign stock mutual fund was down 8.1% year to date through last week, compared with a 5.6% loss for the average U.S. fund, according to Morningstar Inc.

Last year, the average foreign fund slumped 44.3% compared with a 35.7% loss for the average U.S. fund.

U.S. investors had been rabid buyers of foreign stock funds from 2003 to 2007, riding the hot overseas bull market of that period.

But this year, foreign stock funds offered to U.S. investors had a total net cash inflow of just $285 million through Feb. 4 -- less than one-tenth the $2.9 billion net inflow to domestic funds, according to the Investment Company Institute.

Americans have stayed home, and so far that has been the right decision.

-- Tom Petruno