Today's comment is by Eric Roseman, our Investment Director and editor of Global Mutual Fund Investor (GMFI) for the last 15 years.

Dear A-Letter Reader,

It's hard to time the markets. In fact, international investors often say one of their biggest mistakes is chasing performance at exactly the wrong time.

But fortunately, there is a way to avoid this mistake. As part of my presentation at the Total Wealth Symposium last week, I explained how to diversify internationally using special mutual funds known as "global equity funds."

This breed of mutual fund allows you to invest worldwide, including the United States. By using these mutual funds, you can spread your assets across the globe using foreign currencies, while you reduce your portfolio exposure to volatility.

Strangely, the majority of international investors prefer to avoid these consistently profitable products. Instead, they chase the so-called hottest countries or sector funds, usually for dismal long-term results.  

Cut Your Losses, Boost Your Returns

Investors typically hope to ride the next big trend in global investing. They hastily trade the losers in their portfolios for very risky mutual funds that focus on countries, regions or sectors of the market.

The most damaging consequence of this ill-timed strategy is buying mutual funds that have already posted massive double or triple-digit gains. This seriously reduces your margin of safety.

In Panama, I discussed how to reduce volatility, increase total returns and substantially cut your portfolio losses during bear markets. You can do all this simply by overweighting your portfolio with global equity funds.

You can reduce your risk by placing 30% of a long-term growth portfolio in global equity funds, especially those with index-beating returns offshore and in the United States.

Please don't misunderstand me. There's nothing wrong with investing a small portion of your portfolio in potentially lucrative single-country and sector funds. But you don't want to overdo it. If you overweight your portfolio in these asset classes, you open yourself up to big risks if that sector or country falls prey to a correction. Or worse, a bear market.

A global equity fund might not guarantee positive returns in a bear market. But it'll certainly cut your portfolio risk by a significant margin, and possibly lead to profits.

What to Love about These Global Funds

Global equity funds invest worldwide. They typically allocate a large portion of their assets in American stocks because the U.S. is the largest and most liquid market in the world.

The majority of money-managers can't beat the market, so these fund managers usually track the MSCI World Index to boost their returns versus their peers. The MSCI World Index currently holds 45% in U.S. stocks, its largest constituent weighting. The second and third largest markets, respectively, include the United Kingdom at 10% and Japan at 9.5%.

In the last global bear market from 2000 to 2002, the MSCI World Index crashed a cumulative 53% over 36 months. That was its worst 3-year percentage decline in history.

But interestingly, some global equity funds actually earned profits over the same period. These included First Eagle Sogen Global Fund and American Funds World Growth and Income Fund , both closed to new investors. Another great fund, currently in the TSI Portfolio , also posted gains in that three-year period as indexes collapsed.

In fact, mutual funds in the global value equity category earned profits from 2000 to 2002 as their benchmarks plunged. But the majority of international markets and sectors all logged huge losses in that three-year period, especially funds focused in the technology and telecommunications sector. 

Shun the U.S. Markets if You Want To

If you're looking for non-U.S. equity exposure from a diversified mutual fund, consider international stock funds. These funds stay away from the American markets.

Some of these funds also earned profits from 2000 to 2002 and benefited from the U.S. dollar's decline as foreign currencies rallied, starting in 2001.

When you invest in a global or international stock fund, you're also benefiting from the long-term appreciation of most foreign currencies against the U.S. dollar.

Since the dollar peaked in early 2001, it has lost more than 40% versus the single European currency. That has boosted the returns for dollar-based investors in foreign stock funds.   

If you buy funds in this steady sector, you also enjoy lower fees. You don't have to trade these funds or jump in and out of the latest fads, so you'll limit your portfolio expenses.

Over time, you'll save fees from portfolio churning. Also, many of these funds are available No-load, or no up-front dealing commissions. 

Don't Chase the Fads, Wait for the Profits

Chasing the latest trend or fad in mutual funds is the wrong way to invest.

If you prefer to add some spice to your portfolio, then limit your sector and country fund exposure to a small portion of your total assets.

Instead stick with diversified global equity funds, particularly those employing a value investment philosophy. This will boost your long-term returns in all markets and cut your portfolio expenses.    

Now in its 15th year, Global Mutual Fund Investor continues to track and rank some of the world's top-performing money managers, including global funds.

Since April, I've also recommended top non-U.S. dollar offshore funds, a great way to diversify your non-dollar portfolio.       

ERIC ROSEMAN, Investment Director