What's Up With Europe? Should You Avoid Investing There?

Everywhere you turn, there is Europe fear. The banks are in trouble, and are having difficulty meeting the new capital requirements. The Bloomberg Europe Banks and Financial Services Index is down 33.5% for the year. The sovereign debt crisis shows no signs of abating. The picture in Europe is eerily similar to the recent United States scenario. What's an investor to do? Does the situation merit a run from all of Europe, or this a buying opportunity?

End of year is the time investors normally rebalance their portfolios. Adding more funds to fallen asset categories and selling off some of the better performing ones is the standard approach. The recommended plan for

is to maintain your well thought out, and predetermined allocation within a few percentage points. When the allocation gets out of whack, the investor rebalances once or twice per year. This strategy is designed to take the emotion out of investing so that the investor will buy low and sell high. If you are like me, you may do a bit of investigating into the asset categories at this time. EFA and WVO are two of my international ETFs and are trading near their 52 week lows. Reading about these investments and keeping a good watch on the international economic news may plant a seed of doubt when faced with rebalancing. After all, it's likely that your international holdings percentages have fallen. It's not uncommon to wonder, “Maybe Europe is going down and now is a bad time to put money in that market.” With all of the negative news from Europe, Brazil's high inflation, and China's real estate bubble, there's enough fear to go around. Does that mean you should forget about rebalancing?

An important benefit of maintaining a predetermined asset allocation is to protect investors from themselves. Psychologically, we tend to follow the crowd. When everyone was piling into technology stocks in the late 1990's, you felt like a fool if you didn't join the party. Great opportunities in real estate at the beginning of this century preceded a big melt down. If you follow the crowds, you will lose. Buy more when prices are low and sell when they are high. Asset allocation forces you to partake of this discipline, in spite of your tendency to the contrary. Although Europe and the international markets are uncertain, it is well known that the only way to achieve financial gain is by taking on some risk. It may look risky to invest in Europe right now, and the pain certainly may not end soon. But, unless you have evidence that Europe will never rebound, you are well advised to stick to your asset allocation. And if that means adding to your international holdings, and if history is any guide, you will be rewarded over the long term.