Europe On Sale

Last Updated Nov 28, 2010 10:08 PM EST

Is the European economy collapsing? Stocks are down again based on European concerns. First Greece is in turmoil, and now Ireland and Portugal. What's next?

The Vanguard European ETF (VGK) is down for the year, while Vanguard Emerging Markets ETF (VWO) is up about 12 percent. Even the US market is up nearly 11 percent. Is it time to kick Europe to the curb? Absolutely not!

Europe is Value
I'm not denying that Europe has its challenges. I'm merely saying that those challenges have made a disproportionate amount of headline news over the past year. That's why European stocks have lagged the rest of the world.

A well known phenomenon in stocks is the slight tendency for bad stocks (value) to outperform hot stocks (growth). It turns out that expectations are so high for growth stocks that delivering on those expectations is difficult. On the other hand, expectations are so low for value stocks that it's much easier for them to beat those low expectations. That's why the Warren Buffet is known as a value investor.

Well the same think is true in global investing. The strongest and fasted growing economies don't make for the fastest growing stock markets. So you might not want to put all of your eggs in the hot emerging market countries.

My advice
I'm not saying to overweight Europe but I wouldn't underweight it either. If you live in the US and plan to retire there, I recommend the equity portion of your portfolio be roughly two-thirds US and one-third international.

Today, the best way to own the rest of the world is through the Vanguard FTSE All World Ex US ETF (VEU). Soon, however, Vanguard will complete the migration of their Total International Index Fund to a broader index. It will then introduce an ETF and Admiral share class and will become my recommended international vehicle of choice.

Listening to all the media hype will have you avoiding Europe and buying emerging markets and, ultimately, have you chasing performance faster than a golden retriever chasing a frisbee.

More on MoneyWatch
International Indexing - A Better Mousetrap
Euro Versus the Dollar - All Hype and No Change
International Investing - How to really blow it!

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.