ETF Expert

Money Magazine has an undercover financial planner. They call him the "Mole." And the Mole dispenses generic investment advice through popular publications and well-traveled web sites (e.g., CNN.com).

I haven’t figured out why the individual needs to go "underground." Is it a marketing gimmick? Is it an effort to disassociate from the investment selections?

I recently read the subterranean creature’s feature, "Foreign ETFs to Buy Now." In this worldwide stock bear, who wouldn’t want to get a fresh perspective on international investing? Which regions or countries might have a leg up in the near future?

Sadly, I felt that the "Mole" short-changed his/her audience. With hundreds of foreign ETFs, the cylindrical mammal did little more than weasel out of a tough spot.

Here is the advice in a nut shell… or mole hill, if you prefer: 1. You can’t know anything about the U.S. 2. You can’t know anything about any country. 3. You can’t know anything about the U.S. market or foreign markets. 4. You can’t know anything about what will go up or down or when or why. 5. Just buy the entire world.

Investors in the 2000-2002 bear remember the Suze Orman/general media advice of buy-n-hold. Most found themselves losing half of their money… and still struggling to break even here in 2008. We’ve already been slammed by the term, "the lost decade."

However, it did not have to be a lost decade for investors. Those that actively controlled costs, taxes and downside risk did not suffer 50% losses like the buy-n-holders. Consequently, if you don’t lose half your money through holding-n-hoping, you don’t need to double your money to get back.

(Read more about the "Wisdom of Avoiding the Big Loss" here.)

If you subscribe to the notion that you buy the broadest indexes and forget about them, you really don’t know anything. You don’t know that you actually have some control over the investment process, including ETF costs, tax consequences and actual outcomes.

I have no problem with the "Mole" recommending all-world exposure to international stocks through the Vanguard FTSE All World Ex US (VEU). I’ve recommended this fund myself. The difference is, I may sell to ensure that the outcome is a small loss, rather than a big disastrous loss. I may sell to harvest the tax loss, offsetting against prior gains.

The Mole then shifts to other world combos, like the iShares EAFE Fund (EFA) for developed country exposure and the iShares MSCI Emerging Markets Fund (EEM) for emerging market allocation. He/She falls short of telling you how much of each, of course.

He/She also falls short on explaining that Vanguard’s Europe Pacific (VEA) and Vanguard Emerging Markets (VWO) are less expensive than the iShares vehicles; and yet, the funds are virtually indistinguishable in price movement.

In general, the Mole gets the basics correct; that is, international exposure via regions tend to outperform country picks. Yet the Mole fails to recognize that even Suze Orman has abandoned buy-n-hold; in fact, the Mole would have written the same exact column, regardless of whether it were 2004, 2006, 2008 or 2010.

His/Her point is that you don’t know anything, so diversify and buy. The guidance is not time sensitive. With advice like that, then, why is the story called "The Foreign ETFs to Buy Now."

I suppose I could whack the rodent some more. For example, if his/her thesis is that single country investing is a mistake, why does the U.S. get a pass? Can’t invest in Japan? And if one isn’t supposed to abandon international because it has been hot or when it gets cold, is he/she suggesting that one would be ill-advised to have an exit strategy?

All right… I’ve said my peace. The truth is, the Vanguard FTSE All World Ex US (VEU), the iShares EAFE Fund (EFA) and the iShares MSCI Emerging Markets Fund (EEM) are all terrific ways to gain international exposure.

Is now the best time? It’s certainly a better time to begin allocating after international markets are 25%-30% cheaper. That said, there’s no rule that says it can’t go down more. A lot more.

Make sure that if you are allocating more to international today… make sure that you have an exit strategy in place. Perhaps it is a 10% stop-loss. Perhaps it is earnings-based. Perhaps it is December, and you want to make a tax-savvy move. Just have a better plan than "close-your-eyes-and-buy."

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.