The pictures and videos out of Japan in recent days have been nothing short of shocking. The devastation caused by an offshore earthquake and resulting tsunami has been far-reaching, and the danger isn't over yet, as the threat of a nuclear disaster still looms large. If you're wondering how you can help the people of Japan at this terrible time, this link provides a list of ways you can donate through your cell phone to many humanitarian organizations such as The American Red Cross.

Leaving the scene
Unfortunately, this disaster may have long-lasting effects on the nation of Japan far beyond the cost in human lives and the cost of repairing and rebuilding. Japan's economy will likely take a hit as a result of the damage, lost productivity, and resulting investor panic around the world. Indeed, it appears that many hedge funds are already dumping Japanese stocks, sending Japan's Nikkei Index spiraling downward in the worst 2-day drubbing since 1987.

Mutual funds and exchange traded-funds that focus exclusively on the Japanese market are also taking it on the chin. The iShares MSCI Japan Index (NYSE: EWJ) and SPDR Russell/Noumra PRIME Japan ETF (NYSE: JPP) are down 12% to 13% since the beginning of March. The Fidelity Japan Fund (FJPNX) has also been getting thrashed. The fund is down 13% so far this month, and looks to continue its downward trend as the full extent of the damage to the Japanese economy is revealed. It's definitely not going to be easy to stay committed to investing in Japan in light of all the fear and confusion swirling around us.

A zen approach
My first piece of advice to investors is not to panic. It's true we may not have seen the worst of this crisis yet, but it's best not to make decisions in the height of any kind of frenzy. You need information and clear-headed thinking to make the right choices here, and we're still in the midst of sorting out what's going on. If this disaster ends up meaningfully affecting the future prospects for some of the Japanese and Japan-centric companies you own, it may make sense to sell them and divert your money elsewhere. But right now, it's probably too soon to know for sure. Keeping an eye on the long-term will help you avoid making rash decisions in situations like these.

Of course, the troubles at Fidelity Japan and other similarly focused exchange-traded funds highlights perhaps the biggest downfall of investing in funds that only focus on one particular country. When disasters of the natural or economic variety strike that nation, your money is at tremendous risk. That's why I recommend investors almost universally avoid such funds. Diversification is a tool that works, and situations like this serve to highlight why.

But even if you were smart enough to avoid single country-focused funds, your portfolio probably won't be totally isolated from the after-effects of this disaster. Even if the events in Japan have little to no spill-over effect for the rest of the globe (which is unlikely), a diversified international investor still likely has some exposure to Japan. For example, the Vanguard MSCI Pacific ETF (NYSE: VPL) has a 61.5% exposure to Japan, while the Vanguard MSCI EAFE ETF (NYSE: VEA) and iShares MSCI EAFE Index (NYSE: EFA) both sport a roughly 22% allocation to the island nation. That means for an investor who has a 25% total portfolio allocation to diversified foreign mutual funds split up evenly between developed and emerging markets, about 2% to 3% of the total portfolio is held in Japanese stocks. That's enough to be concerned, but not enough to panic about.

Risk and reward
Of course, if you own actively managed foreign mutual funds, you could have a much greater than average exposure to Japan. For example, First Eagle Overseas (SGOVX) has 41.8% of its equity assets, or 29% of total fund assets, in Japanese stocks. This translates to over $500 million invested in Japan for the fund. Likewise, Dreyfus International Stock (DISAX) has nearly one-third of total portfolio assets invested in Japan, according to Morningstar data. While fund holdings with multinational reach like Honda Motor (NYSE: HMC) and Canon (NYSE: CAJ) shouldn't be as materially affected by this crisis, smaller and more domestically focused Japanese firms could feel a bigger bite.

Ultimately, if you are a stock owner, once the picture in Japan becomes a bit clearer, you should reexamine your reasoning behind owning any firms based here. If the economic toll of this disaster will meaningfully affect the future outlook of your holdings, you should reconsider your hypothesis for owning them. Of course, if the Japanese stock market is knocked for a loop, that's also a cue to look for newly cheap companies that might interest you.

If you are a fund holder, don't panic about events in Japan sinking your portfolio. Take a few minutes to dig down and see exactly how much exposure to Japan you have so you can at least put your portfolio returns in context. It's no fun to see minimal or negative returns from your funds, but if you understand why those returns are the way they are, it can prevent you from making needless and poorly timed sell decisions. Don't shuffle your foreign allocation to avoid exposure to Japan right now, but keep your focus on the long-term. And let's hope that Japan's economy, and its populace, can rebuild and emerge from this disaster stronger than ever.

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