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. 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.