Investing abroad used to pay off better

— -- U.S. investors have been sending their money abroad for the past several years. When that money has returned, investors have been able to boast about their savoir faire and elan.

This year, however, U.S. investors have been yelling, "Sacre bleu!" and "Zut!" What investors have forgotten is that investing abroad isn't always a cure for U.S. stock market malaise.

The past five years, investors have poured a net $372 billion into diversified international funds, according to Lipper, which tracks the funds. To put that in perspective, it's more than two and a half times the value of all the gold in Fort Knox at today's prices.

For much of the past five years, investors have been amply rewarded for shipping their money abroad. The Lipper International Fund index has soared 164% in the past five years, vs. 70% for the Standard & Poor's 500-stock index. This year, the results have not been quite as happy. The S&P has fallen 6.5% this year, vs. 5% for the Lipper International Fund index. What gives?

International funds need two things to clobber U.S. stock funds. The first, and more important factor, is good returns from abroad. And most countries' stock markets have fared very well the past five years.

The German stock market, for example, has gained an average 16.5% a year since April 2003, according to MSCI Barra, which tracks foreign markets. The Australian market has soared an average 13.9% a year. In contrast, the S&P 500 has gained an average 11.2% a year the past five years.

Currency is the second. The falling dollar has turbocharged foreign investments. When the dollar declines in value, international investments rise. Think of it this way: Suppose you had bought 1,000 euros five years ago, and stuffed them in a safety deposit box in the Banque de Blancmange. Back then, a euro was worth $1.09, so you'd have spent $1,090.

Today, however, a euro is worth $1.59. Were you to open your safety deposit box and convert your euros to dollars, you'd have $1,590 — a 46% gain.