IS IT TIME TO LEAVE THE COUNTRY?

By Daniel Kadlec

Boris Yeltsin is resting easy after his recent heart bypass surgery. But what if his rest verged on eternal, and Russia veered toward a political coup? Investors with all their money stashed in U.S. stocks wouldn't have to worry much. The echo of political turmoil in distant markets might be barely audible when Wall Street is roaring like Niagara Falls. But for those invested overseas--through mutual funds or directly, in stocks--the noise would be more like a foghorn in their bedroom. The clamor of social, political and economic uncertainty just might send prices cascading lower.

The critical question for investors then: Why bother sending precious greenbacks to so-called emerging markets when there's a risk the trip will be one way? In fact, why bother with foreign stocks at all, including those in developed markets like Germany and Japan?

The issue is doubly compelling as the U.S. market chugs ever higher. The average blue-chip stock has risen a stunning 29% annually in the past two years, nearly triple the historical 10.5% benchmark, making the U.S. the best-performing major market on the globe in that period. The Dow Jones industrial average blew past the 6300 marker last week, more than double its level less than five years ago. America is on a roll, and with Wall Street euphoric over the election results, it seems nothing can go wrong. U.S.A. all the way! Besides, giant U.S. companies such as Coca-Cola, Gillette and Philip Morris are doing more business in foreign countries every year, giving shareholders of those domestic blue chips all the foreign exposure they may want. Foreign stocks--who needs 'em?

You do, perhaps, although the answer depends largely on how patient you are and how much risk you can stomach. Foreign stocks, especially those traded in hinterlands such as Sri Lanka and Pakistan, are notoriously volatile. But such budding markets also promise far faster growth than anything the silver-haired domestic economy is likely to muster, presenting the tantalizing possibility of such stocks rising an average 20% to 30% a year over long periods. So far, no large schools of U.S. investors are swimming overseas. A vicious bear market that clipped emerging-market stocks by 30% or more in 1994 remains a powerful deterrent. But Michael Price, the highly regarded manager of the Mutual Series funds, recently launched a European fund to capture values he sees overseas. The fund company Federated Investors, which manages more than $100 billion overall, has launched five foreign-stock funds this year for similar reasons.

These big-picture investors are drawn to foreign stocks now for precisely the reason you may be shunning them: the recent superior performance of U.S. stocks. "It's very, very clear that markets don't go up forever," warns Mark Mobius, who oversees $10 billion in emerging-market stocks for Templeton Funds. "The poor guy who is only in U.S. stocks is taking a big risk."

If that sounds like you, take heart. By at least one measure, foreign stocks have rarely been so cheap. If you choose to diversify now, you won't have to buy into sky-high markets like those in the U.S., though you'll want to be careful because some foreign markets, such as Sweden, Ireland and Switzerland, have risen sharply and are on the high side.

Hundreds of mutual funds target specific countries and regions. Most of them are open-end funds, meaning you can buy and sell anytime at a price that perfectly reflects the underlying value of the stocks in the funds' portfolios. In smaller numbers there are closed-end "country funds," whose shares trade freely on the New York and other stock exchanges. Closed-end fund prices are governed purely by supply and demand, so they frequently trade above or below the underlying value of the stocks in the portfolios. Today the average country fund trades at a discount of 15%. Now, that's a bargain. Not since 1990 has the average discount to net asset value on country funds been so large, a reflection of investors' strong preference for U.S. stocks at the moment. But "if you can find a country you like, and a fund at a deep discount, you've got an enticing package," says analyst Donald Cassidy at Lipper Analytical Services. The accompanying chart shows 12 funds trading at discounts. There are no sure winners. But diversifying your stock holdings is always advisable. A good start is 20% in foreign markets, including 5% in emerging markets. Why wait? This may be your best chance to go abroad for a while.

Daniel Kadlec is TIME's Wall Street and investing columnist. Readers can reach him online at kadlec@time.com