Europe Still Belongs in Everyone’s Portfolio

Europe might seem the last place you’d want to invest your money. European markets have fallen nearly 20% this year in dollar terms, and the debt crisis grinds on.

But European stocks should be in every investor’s portfolio, says Jonathan Bergman, CFP, an expert on asset allocation and vice president of Palisades Hudson Financial Group.

“Europe’s leaders won’t let a major financial institution collapse and set off a 2008-style chain reaction throughout the financial system,” he predicts. “They will ultimately solve the Greek debt crisis and other systemic problems. But it may not be until the very last minute.”

Germany, the strongest state financially and often seen as the most prudent, has a powerful incentive to stay in the eurozone, he points out.

If Germany were not in the eurozone, its currency would be the strong deutschemark, and its export economy would be severely impacted, Bergman says. The relative weakness of the euro due to weaker eurozone economies has helped make Germany — with just 82 million people — the world’s second largest exporter, behind China and ahead of the United States.

“Make no mistake, Germany has been a major beneficiary of the eurozone,” he says.

Mix large and small caps, passive and active funds

Bergman advises putting 40% of your international equity portfolio in Europe — a bit less than most international indices allocate to Europe. Since his firm recommends allocating 35% to foreign stocks, that equals 14% of your total equities in Europe.

Put 70% of your European investments in a large-cap European index fund or ETF, he says.  With it, you’ll get positions in multinational powerhouses like Royal Dutch Shell, Nestle, Roche and GlaxoSmithKline to name a few.

Allocate 30% to European small-caps. Unlike large-caps, with small caps, active management adds enough value to make it worth the management fee, Bergman says.

He likes mutual funds such as DFA International Small Cap Value, Oakmark International Small Cap and T. Rowe Price International Discovery.

“Don’t give up on Europe,” Bergman says. “There are great franchises there. But don’t over-allocate. You’ll want to leave room in your international portfolio for investments in Australia, Canada and the emerging markets. Those countries and regions have less fiscal debt; some are even running current account surpluses.”