Waggoner: You can diversify without global funds

— -- You may like Greek food. You may be grateful for ancient Greek democracy. You may even have read the Iliad.

So what did you do to Greece, you wonder, that made it play such havoc with your 401(k)?

The short answer is that it really is a global economy these days, and a slip in Greece can become a plunge on Wall Street. And oddly, for that very reason, you may not need an international fund in your portfolio.

Greece's gross domestic product is $305 billion, which is less than the combined assets of the nation's two largest mutual funds, Pimco Total Return and Vanguard Total Stock Market Index fund. Its sovereign debt — debt backed by the government's promise to repay — is 340 billion euros, or $458 billion.

In contrast, U.S. GDP is $14.6 trillion, and its public debt — mainly Treasury bills, bonds and notes — is $10.3 trillion.

Greece got so far into debt because of its rich government salaries, benefits and its lax tax collection. When the government didn't have enough money, it borrowed more.

Why were borrowers so willing to lend to Greece? Because Greece is part of the eurozone — the 17 nations that use the euro as currency. Borrowers thought the eurozone's 16 other nations wouldn't let Greece default.

Many of those borrowers were banks, who could use Greek bonds as capital — the money used as a cushion against losses. As the Greek crisis worsened, it became clear that Greece couldn't pay off all its creditors, many of which were large European banks.

Investors then started looking askance at other countries, notably Portugal, Italy, Ireland and Spain. They also began backing away from European banks. The nightmare scenario: The euro would collapse, and people who held euros would have to exchange them for newly minted francs, drachmas and blatherskites.

Problems went from tiny Greece to the eurozone, and ultimately, to the U.S. If European banks were to collapse, U.S. banks might also run into problems, and banks never suffer alone. It's hard to have a healthy economy without a healthy banking system.

On Wednesday, world central banks came together to help ensure that European banks could get enough dollars to repay dollar-denominated loans. It's not a cure; it just helps make sure that the financial system can keep operating while the Europeans sort out their problems, if they can.

All of which brings us to international funds. Most people own international funds for diversification: There's usually a bull market somewhere on the planet.

Unfortunately, most international stock markets run more or less in lockstep with the U.S. markets. Consider the Lipper international large-cap core index, which measures the largest international funds — the ones most likely to be in your 401(k). ("Large-cap core," in fund-speak, means the fund invests in stocks of large companies selling at reasonable prices, relative to earnings). International large-cap core funds track their U.S. counterparts extraordinarily closely. The past five years, Lipper's large-cap core international and large-cap domestic core indexes have a 94% correlation.

True, there are many dandy companies headquartered overseas. But the stocks of these companies are often traded in the U.S., too.

Overseas funds are hurt when the dollar rises in value — something it has been doing lately, because investors aren't entirely convinced that the euro will survive.

If you must have an international fund, look for one less correlated with its U.S. counterparts. One place to look is Lipper's multicap core category. These funds can invest in large or small companies, which gives them room to roam.

Because these funds do have room to roam, make sure they roam in a direction you like. First Eagle Fund, for example, has SPDR Gold Shares as its sixth-largest holding, says Morningstar. SPDR Gold Shares invests directly in gold bullion.

Nothing wrong with that, but it does show that the fund's managers have an independent streak — and there's nothing wrong with that, either. If you're looking for diversification, you'll need a fund that doesn't march in step with everyone else. Many international funds do.