What ever happened to Asia? Last time I looked, 3.5 billion people lived there -- three times as many as in North America and Europe combined. Asia is the fastest-growing part of the world and already accounts for one-quarter of all global economic output. Yet Asia gets almost no respect from U.S. investors.

Part of the problem, of course, is Japan. Over the past decade, its economy has stagnated, and its stock market has disintegrated. The Nikkei 225, Japan's benchmark index, has dropped 30,000 points, or 78 percent, from its 1989 peak. Stocks did not merely crash -- they kept crashing. In the past three years, a period when recovery was always just around the corner, the typical Japanese mutual fund lost 60 percent of its value.

Then, there are the "Tigers" -- smaller Asian countries that turned aggressively to capitalism 20 years ago and generated vast enthusiasm among investors in the mid-1990s. But that boom went bust in 1997, practically destroying the currencies of South Korea, Thailand, Malaysia and Indonesia. Between July 1997 and June 1998, T. Rowe Price New Asia (PRASX), a relatively tame mutual fund that covered the region, fell by more than half.

As for China: Its stock market is almost a black box. Foreign investors are welcome to insert money blindly and hope that more comes out the other end. But there are minimal legal protections, poor financial reporting and little transparency.

So it is hardly a surprise that many U.S. investors have concluded that international diversification means Europe -- and maybe even a little Mexico and Canada -- but not Asia.

Many mutual funds cater to this public view. Consider Julius Baer International Equity (BJBIX), a fund with a top rating (five stars) from Morningstar. Managers Richard Pell and Rudolph-Riad Younes can invest shareholders' money anywhere outside the United States. At the end of last year, 85 percent of their assets were in European stocks and 7 percent in Asian stocks, even though the two continents have almost exactly the same economic output. The Baer fund has 10 times as much money invested in the stocks of Hungary than in the stocks of South Korea, Taiwan, Thailand, Hong Kong, China and Singapore combined.

"Most international funds," says Mark W. Headley, president of Matthews Asian Funds in San Francisco, "are more European funds in disguise."

So, while investing in Asian stocks is not easy, concentrating solely on companies based in Europe and the United States could be a big mistake. "The radical bias against Asia has no rational justification," Headley says.

In fact, there may be a decent argument for ignoring European stocks as a specific asset class for diversification purposes, but none at all for ignoring Asian stocks.

Since 1995, European stocks and U.S. stocks have been moving, first up and then down, in tandem. Their mathematical correlation has increased, so they no longer offer the balance that's so important in a portfolio. As a result, my advice has been simply to buy the best companies, whether they are headquartered in Europe or the United States.

But Asia is another matter. The movement of Asian stocks often bears no resemblance to the movement of U.S. stocks -- a condition that can smooth the ride of an investor who owns both. Compare Matthews Pacific Tiger (MAPTX), a typical regional fund, with Vanguard Index 500 (VFINX), the largest fund that mimics the U.S. benchmark, the Standard & Poor's 500-stock index. In 1997, the Asia fund lost 41 percent while the U.S. fund gained 33 percent; in 1999, the Asia fund gained 83 percent while the U.S. fund rose only 21 percent; in 2001, the Asia fund gained 8 percent while the U.S. fund lost 12 percent.

Last year, the S&P 500 fell 22 percent, but Japan (in dollar terms) was down only 10 percent, and Malaysia, down 4 percent. Meanwhile, Korea was up 1 percent, Thailand up 23 percent, Indonesia 31 percent and India 7 percent.

Headley sees two good reasons to invest in Asian stocks. The first is that "you don't know what the next five or 10 years will bring." In other words, since the future is unknowable, you should make sensible investments all over the lot. You'll have some winners and some losers but, overall and over time, if the world economy grows, then stock prices should rise smartly.

Headley finds it strange that many investors are obsessed with "slicing and dicing the [U.S.] equity market structure about 20 different ways -- value and growth, small to large capitalization," etc., etc. But "in international investing -- i.e., the other 95 percent of humanity and the other 50 percent of [world] market capitalization -- we put down the scalpel and pick up the sledgehammer." That is, investors think they are getting diversification merely by putting, say, 10 percent of their portfolio into an international mutual fund -- which often turns out to be a fund that puts the vast majority of its assets into European stocks.

If one-tenth of your portfolio is in an international fund and only one-quarter of that is in Asian stocks, then just 2.5 percent of your total assets are Asian. Is that enough? Headley doesn't think so. Asian companies represent 15 percent of global market capitalization (that is, the value of all shares according to investors), and Asia produces 24 percent of the world's GDP. Headley believes market cap is "a very skittish indicator," and economic output is the basis for a more "sensible weighting." Still, take the most pessimistic scenario for Asia and cut the GDP share in half. That means that roughly 12 percent, or about one-eighth, of your stock holdings should be Asian.