Last Updated Nov 28, 2010 10:08 PM EST
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.
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.