How can an investor capitalize on a European recovery?
— -- Q: If brave investors would like to bet on a recovery of Europe, how would they do it?
A: It's human nature. When you sense danger, run.
And that's exactly been the response by investors to the sovereign debt crisis in Europe. International stocks, especially those in developed nations, have been terrible performers this year. Investors who loaded up on foreign stocks in 2009 thinking that would give them a break from the U.S. pain have been sorely disappointed.
But now that international stocks are down more than 15% as a group this year, some might wonder if the stampeding herd has run away from some opportunity.
It's the perverse truth of markets. When investors panic from a diversified basket of stocks, and push the price down, they are increasing the expected returns for future investors. Certainly, when it comes to individual stocks things are more complicated because companies can and do fail and the value of their shares can go to zero. But when you're looking at a broad market, such as a collection of all the large-company stocks that trade in Europe, panic selling creates opportunities for future investors.
Some suspect the exodus from international stocks might be one of those opportunities for savvy investors to cash in. Just to be clear, attempting to time the market and pick the perfect time to jump into international stocks is very difficult at best and impossible at worst. And while international stocks have fallen this year, especially in parts of Europe, they could continue to fall if the news keeps getting worse.
Even so, investors with diversified baskets of stocks know that European, Asia and emerging markets stocks can help spread the risk of a stock portfolio. It's prudent to have some slice of most stock portfolios reserved for international stocks.
If you don't have international stocks in your portfolio now, or if your allocation to them has fallen, you might think about it. And now might be a good time to add European stocks, since they're cheaper than they were.
And remember, here are scores of mutual funds which invest in Europe and international stocks. You can find those using USATODAY.com's free mutual fund screener.
Even though European stocks are beaten up that doesn't mean they'll rise next week, next month or even next year or two. You just know that prices are down and that may present investors willing to take a chance with a better deal.
Timing a European crisis is tricky and you're unlikely to get the timing just right. That's why it's best to buy European stocks as part of a plan that you'll stick with.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
