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Investing Specialists

Rebalancing? Foreign Stocks May Not Be as Cheap as They Seem

Before backing up the truck for foreign funds, recognize that much of their underperformance is currency related.

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At one of Morningstar's investment conferences years ago, a top executive at one of the big mutual fund shops said that he maintains a simple contrarian portfolio alongside his strategic, buy-and-hold portfolio. For the contrarian component, he would regularly rotate into whichever of the firm's funds had underperformed in the short term. When those once-slumping funds recovered, he would cut them loose. Employing such a naïve contrarian strategy not only gave underperforming fund managers a vote of confidence, he said, but the approach had also performed quite well over time.

Although rebalancing is milder, investors also employ a contrarian tilt when they boost the holdings that have slumped in value and lighten up on those that have performed especially well. Rebalancing isn't foolproof, but over time it will tend to reduce risk in a portfolio by prompting the investor to scale back on overvalued market segments and boost their positions in areas that could be due for a rebound.

Christine Benz has a position in the following securities mentioned above: VTRIX. Find out about Morningstar’s editorial policies.