International Stocks: Marked Down!

COMPARED WITH THE U.S. market, Japan is on sale, and so are the rest of the Pacific Rim, portions of Europe and even, despite a robust 1997, Latin America. International-fund managers like T. Rowe Price’s Martin Wade see Europe in economic recovery, Mexico still making up for lost pesos and Japan ““past its worst.’’ Moreover, non-U.S. stocks make up most of the world market and have outperformed U.S. issues almost constantly during the last 20 boom years. It wouldn’t hurt to send 15 percent or so of your money overseas, even if you can’t afford to go there with it.

But send it along smart. This year a rising dollar has robbed global investors of as much as half of their returns, so it makes sense to look for a mutual fund that’s hedging its currency risks. To balance a domestic-stock portfolio, go light on Europe and heavier on funds that buy in Latin America and Japan, whose incipient recovery after six years of slump has prompted Morningstar researchers to call it ““the diversification ideal.’’ Avoid global-stock funds that may sound international but keep too much of their money in U.S. multinationals. And have patience. ““Japan can be on sale for a very long time,’’ notes analyst Olivia Barbee.

Bonds: No Counterweight, But . . .

FORGET THE GOOD OLD days when you could count on rising bond prices to pull your portfolio out of a stock-market slump. In recent years bonds and stocks have been more likely to move in tandem than to diverge, reports Ibbotson Associates. So think about why you want to own bonds before you buy them. If you’re looking to diversify your portfolio and have years to wait, you can pull in decent returns and steady income with a mix of bond mutual funds–government, high yield (a.k.a. junk) and foreign bonds.

But remember that bond-fund portfolios never mature–they just keep revolving. If you need to sell when interest rates are rising, you can end up with a loss. If you’d rather not ever worry about bond prices, just buy individual bonds of varying maturities. Financial analyst Peter Forbes pushes Treasuries, bought direct from your nearest Federal Reserve bank: ““They’re cheap, they’re not subject to state taxes and your broker will hate you,’’ he promises.

Real Estate: A Different Drummer

IF EVER THERE WAS A MARKET that ignored stocks, it’s real estate, where buildings rise, sit empty and fill up according to rhythms that have little to do with the Dow Jones industrial average. If you’re after diversification, forget being a landlord, and don’t even think about that little beach-cottage fantasy. Find a real-estate investment trust mutual fund that accumulates commercial, retail and residential buildings nationwide and watch the rent pour in. New York adviser Ron Roge likes to keep 10 percent or so of his clients’ money in REIT mutual funds. But be careful: some of those funds go beyond bricks and mortar and invest in mortgages, lenders, builders and the like. The more of that you buy, the less crash-cushioning insurance you’re getting. And don’t expect eye-popping paybacks. With better than 40 percent returns in the last 18 months, these funds may be getting ready to settle down.

Money-Market Funds: Good Soldiers

CASH IS ANYTHING BUT trash to investors who have been hurling $7.2 billion a month at money-market funds this year and added about that much in that mid-August week when stocks started turning sour. After all, a 5.1 percent average return in an account that gives you a checkbook, never-been-a-loss security and instant access to your money looks pretty good compared with daily stock-market negatives or 2 percent bank interest rates. A money-market fund is the perfect parking place for emergency money, cash you’ll need soon or a little bit of padding that you’re not ready to commit to the market just yet.

Despite the relative security of money funds, shoppers shouldn’t just pull any offering off the shelf, says Gordon Starr, publisher of Money Fund Newsletter. The safest, best-yielding funds tend to have average maturities in the midrange of 40 to 60 days and to have at least $500 million in assets. Think twice about the very highest-yielding funds, like Zurich Yield Wise, currently topping the charts with a 6 percent yield. It’s paying out its own management fees in the form of extra yield to attract investors, and will fall back into the 5.5 percent range in a few months, reckons Starr, who cites Strong Heritage, Vanguard Prime and Olde Premium Plus money funds as the most stable best-yielders.

With a little extra money tucked away there, you’ll be ready for the next buying opportunity, wherever you find it.

STERN’S e-mail address is 72160.1546@compuserve.com.