Markets

Should You Avoid Investing in Europe?

Europe is mired in a sovereign debt crisis that threatens its economic stability along with the rest of the world's. Should you dive in head first and invest or should you bail?

Despite the fever pitch of debt problems, the euro has a yearly gain of almost 8% and European stocks (NYSEArca: VGK) are down a modest 6.42%. What does it mean?

Let's analyze three investment strategies for navigating Europe's financial crisis.

Single Focused Plays

Investing in stocks of euro-zone countries like Germany (NYSEArca: EWG), Sweden (NYSEArca: EWD) or Switzerland (NYSEArca: EWL) that have largely avoided too much government debt is one approach. The caveat about this method is that if problems from the weaker euro-zone members contaminate the stronger countries, this strategy might not be effective.

The other strategy of sticking with European countries that still have GDP growth, looks good on paper, but is becoming more difficult to execute. Germany's second quarter GDP figures of just 0.1% badly missed expectations of 0.5% growth and shows that growth is decelerating. If the strongest country in the Union is losing steam, it's not a good sign. It means that Germany and France's (NYSEArca: EWQ) association with weaker countries like Ireland (NYSEArca: EIRL), Italy (NYSEArca: EWI), Spain (NYSEArca: EWP) is having a negative impact.

A Broader Plan

Most broadly based international ETFs like the iShares MSCI EAFE Index Fund (NYSEArca: EFA) or the Vanguard FTSE All-World ex-US ETF (NYSEArca: VEU) will have some exposure to Europe, but some diversified funds have less euro-zone exposure than others.

VEU, for instance, holds just under 50% of its exposure to European equities while keeping another 37% to Asia and 13% to North and South America. In contrast, EFA has much higher exposure to European stocks (66.13%). If you're trying to limit exposure to Europe's equity market, clearly VEU is the better choice so far as broadly diversified international ETFs are concerned.

Flee to the Mountains

Another strategy for dealing with Europe's financial crisis is to avoid the entire region altogether. This strategy will be impossible to do if you own broadly diversified international equity ETFs because it's in their mandate to always hold some exposure to European stocks. If you don't like this feature, you can avoid the broadly diversified international funds and instead focus your international bets on other geographic places like Latin America (NYSEArca: ILF) or Asia (NYSEArca: GMF).

Lost Leaders

Europe's economic leaders have done little to instill confidence that investing in Europe is a good idea. Rather than finding believable solutions to end the debt crisis, they've resorted to anti-free market tactics.

Their latest stunt was to ban the legitimate short-selling of banking stocks in Belgium, France, Italy, and Spain.

In a public statement the European Securities and Markets Authority (ESMA) warned against, 'the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumors and false or misleading news.' Did anyone at the ESMA bother to check the results of failed experiments with short-selling bans in 2008 by both the U.K. and the U.S.? Apparently, they were too busy scapegoating short-sellers.

Your Strategy

The stock market and the regulatory bodies supposedly supervising it have become more irrational with each passing day. And the only way to successfully combat them and other threats is to have a realistic investment strategy with proven results.

ETFguide's Ready-to-Go ETF Portfolios are an excellent model to follow in building your very own portfolio. Eventhough major stock benchmarks are posting year-to-date losses, the portfolios have performed better. You follow along and we tell you which ETFs our portfolios are buying, selling or holding.

Europe's debt crisis is just one of many issues investors face and investing in Europe is only suicidal if you're doing it blindly. In the end, having the proper investment mix doesn't happen by accident.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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