The case for investing in European stocks

A European Union and a Greek flag fly in front of ancient Parthenon temple, in Athens, on June 17, 2012 as Greeks vote in the most crucial elections in decades.
AP Photo/Petros Giannakouris
A European Union and a Greek flag fly in front of ancient Parthenon temple, in Athens, on June 17, 2012.
AP Photo/Petros Giannakouris

(MoneyWatch) In the past year or so, I've frequently been asked why anyone would want to own European stocks. A very good question. With all of the uncertainty over Greece, Portugal, Spain, and Italy, the euro could collapse. Even France's debt has been downgraded to barely investment grade. So why would anyone in their right mind want to own European stocks?

While international stocks have lagged U.S. stocks over the past 18 months, it may surprise you to know that the top-performing international region was Europe. In 2011, European stocks declined 11.48 percent, the Pacific Rim lost 13.73 percent, and emerging markets plunged 18.73 percent. Through mid-June, European stocks eked out a small gain of 0.19 percent, while the Pacific Rim gained 1.16 percent and emerging markets climbed 2.68 percent. (All of these returns are using the broad Vanguard European, Pacific, and Emerging Market index fund ETFs applying Morningstar data.)

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I can't say how European stocks will perform next week or next year. But I can say that European economic growth will be slower than countries like China, India, and Brazil. That means European stocks are more of the value (slower growth) variety, while emerging market countries are growth stocks. Also certain is that at least according to some data, value stocks outperform growth equities over the long run.

In short, it isn't shocking that European stocks performed better than the rest of the international market since 2011.

It may seem as though successful investing should be about taking information and then making decisions on what to buy and sell based on that information. But if the whole world already has this information, then markets have already reacted to it, and taking action based on what everyone knows amounts to following the herd. That's why so many people panicked in March of 2009 and missed out on the ensuing bull market. Conventional wisdom predicted the inevitability of a great global depression.

How I own Europe

I'm holding on to Europe and own most of my European stocks through the Vanguard Total International Stock Index Fund (VXUS). It owns the entire rest of the world and has an annual expense ratio of 0.18 percent, along with a full 41.9 percent of the value of those stocks is in Europe.

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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.