It's easy to forget that as horrid as things have been for domestic stocks, overseas equities have fared even worse. For years we've been told by financial experts to allocate an increasingly large part of our buy-and-hold portfolios to foreign investments. That's still sound advice if you live long enough. For the more immediate future, global forecasts for 2009 are starting to come in and they aren't pretty.

The global economics teams at Merrill Lynch (MER) and Deutsche Bank (DB) Private Wealth Management group are painting next year as one of dismaying and difficult transitions. From the developed world to emerging economies, plenty of opportunities look cheap. But caveat investor. Weakening global economic growth makes overseas investing trickier and riskier than ever.

So let's take a moment to enjoy the recent rallies in foreign stocks. It's hard to believe they'll last long, and they've got a lot of ground to recover before they make investors close to whole.

Here's a little perspective. In terms of total return, U.S. equities have lost 38% of their value year to date, according to S&P Global Equity Indices. That's awful, to be sure. Now for something even worse. Europe is off almost 50%, while Asia Pacific has dropped 45%. The developed world as a whole has been a losing proposition to the tune of nearly 43%. And as for emerging economies? Forget it. They've gagged up a total loss of more than 55%.

In other words, if you allocated a substantial part of your nest egg to foreign equities, well, that only dragged your portfolio deeper into the morass. Based on the outlook for 2009, it might be time to bring some of that allocation home.

For developed economies, Deutsche Bank likes U.S. equities over European or Japanese ones, and the thinking appears solid. The economists expect the U.S. to lead any eventual global recovery, helped by the government's massive (and ongoing) stimulus spending. Plus, that's been the historically tendency, anyway.

As for emerging markets, there's not nearly so much to love. True, they are the cheapest equities out there. Deutsche Bank points out that they have the lowest price/earnings ratios and highest return-on-equity ratios anywhere to be found. But too many risks, including their reliance on the developed world, make them volatile and poised for further decline.

Merrill Lynch points out that while emerging markets continue to grow, it's at their weakest rate since 2001. The days when the developing world financed America's excess consumption are over. Meanwhile, the bedrock of the emerging market the BRIC economies of Brazil, Russia, India and China have plenty of resounding problems to go around.

Fresh data confirm that the expected slowdown hit Brazil in October and looks only to be worse in November, Merrill says. China is also cooling off. That's bad news for Asia, naturally, but especially for Hong Kong and Taiwan. In a back-handed compliment, Merrill calls India the "lesser loser," but only because it exports very little to China. Oh, and Japan said Tuesday that it fell into a deeper recession in the third quarter than it previously figured.

As for oil-rich Russia, with crude flirting with $40 a barrel and overall commodity costs off about 75% from their peak, well, let's just say this country is best left to those with only the heartiest appetite for risk. S&P on Monday cut Russia's foreign-currency sovereign credit ratings.

"Right now we're allocated 10% overseas," says Joe Clark, managing partner of Financial Enhancement Group of Anderson, Ind. "Back in July we were at 35%." (See chart below.) Within foreign equities, Clark's favorites are China and Japan, allocated at 5% a piece. He's eyeballing Brazil but waiting for more visibility there. "And we have nothing to do with Europe," Clark says.

With 2009 shaping up to be another painful year for overseas markets, it may make the most sense for Americans to keep their money close to home. For those who can't resist dabbling in foreign affairs -- or for those who want the geographic diversification -- allocate only a small portion of a portfolio overseas, and mostly to the developed world.

There's No Place Like Home

Financial Enhancement Group's Foreign vs. Domestic Allocation Heading Into 2009

Source: Financial Enhancement Group