European stocks were average to poor performers last year.However they can be good bets for this year for many reasons including upcoming elections in countries such as Greece, Ireland, Spain and the UK and more importantly yesterday’s major announcement from European Central Bank.

From a Bloomberg article:

Mario Draghi led the European Central Bank into a new era, committing to a quantitative easing program worth at least 1.1 trillion euros ($1.3 trillion) to counter the threat of a deflationary spiral.

The ECB president shrugged off determined opposition led by German officials with a pledge to buy 60 billion euros every month through September next year in a once-and-for-all push to put more cash into circulation and revive inflation. To assuage critics, the region’s 19 national central banks will make 80 percent of the purchases and take on any risk they carry.

A near-stagnant economy and outright declines in consumer prices forced Draghi’s hand six years after the Federal Reserve took a similar step — and three months after the U.S. central bank ended its purchases. The 67-year-old Italian’s gamble is that the benefits of QE — should it work — outweigh the threat of a backlash in Germany.

Source: Draghi Commits ECB to Trillion-Euro Asset-Purchase Plan to Fight Deflation, Jan 22, 2015, Bloomberg

Indeed by any measure 1.1 Trillion Euros is a ton of money that is bound to have a major impact on asset prices especially equities. Even before this bold move by the ECB, European equity indices were up nicely so far this year. The returns of the major European benchmark indices as of Jan 21, 2015 are listed below:

• UK’s FTSE 100: 2.5%
• France’s CAC 40: 5.0%
• Germany’s DAX: 5.0%
• Spain’s IBEX35: 0.5%

On the other hand the S&P 500 was down by 1.3% year-to-date.

Investors holding cash to invest can take advantage of the attractive prices of many European stocks. Ten stocks from Euro-zone are listed below with their current dividend yields for potential investments:

1.Company: ING Groep NV (ING)
Current Dividend Yield: Not paid
Sector: Banking
Country: The Netherlands

ING recently paid off the loan it took from the Dutch state and is on track to start dividend payments this year that has been suspended since the global financial crisis.

3.Company: Banco Santander SA (SAN)
Current Dividend Yield: $0.26
Sector: Banking
Country: Spain

Santander raised more than a billion dollar in new capital a few weeks ago but has cut its dividend by two-thirds. The fall in stock price presents an excellent opportunity for long-term investors.

3.Company: Siemens AG (SIEGY)
Current Dividend Yield: 3.57%
Sector:Industrial Conglomerates
Country: Germany

4.Company:Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 6.25%
Sector: Electric Utilities
Country: Portugal

5.Company:Air Liquide (AIQUY)
Current Dividend Yield: 2.58%
Sector: Chemicals
Country: France

6.Company: Total SA (TOT)
Current Dividend Yield: 6.12%
Sector:Oil, Gas & Consumable Fuels
Country: France

7.Company: Allianz SE (AZSEY)
Current Dividend Yield: 4.40%
Sector:Insurance
Country: Germany

8.Company: AXA Group (AXAHY)
Current Dividend Yield: 4.79%
Sector: Insurance
Country: France

9.Company: Anheuser-Busch InBev SA/NV (BUD)
Current Dividend Yield: 2.75%
Sector: Beverages
Country: Belgium

10.Company: Technip SA (FTI)
Current Dividend Yield: 4.44%
Sector: Energy Equipment & Services
Country: France

Note: Dividend yields noted above are as of Jan 22, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long FTI, SAN, ING, AXAHY

Diversification is one of the simple and effective way to reduce risk and increase potential returns. Putting all eggs in one basket is a recipe for disaster.It is important to diversify not only among asset classes, but also between sectors when investing in stocks, between countries, regions, etc.

The first decade of the 21st century was dubbed the lost decade for stocks. I wrote an article about this topic in Dec, 2009. From that article:

Click to enlarge

The chart shows the return of U.S. S&P 500 Index from Dec 31, 2009 thru Dec 14, 2009. The S&P 500 lost 23% in this period. During the same period market indices in developed countries like France, Finland, etc.showed relatively better performance. The main stock market indices in the Netherlands, Japan and Greece performed worse than the S&P 500.

It is interesting to note that while the S&P lost 23%, the Brazilian Bovespa Index gained an astonishing 318% during the same time.This is one reason why US investors should look beyond the US for better returns.

Michael Batnick, Director of Research of Ritholtz Wealth Management also discussed about the lost decade for stocks in an article. His take on this subject also shows the importance of diversification.From the article by Mr.Batnick:

Click to enlarge

The period from 2000 through 2009 is referred to as a “lost decade” for U.S. stocks. Over this period, investors were not rewarded with an equity risk premium, they were better off in risk-free treasury bills. Not only were they not rewarded, they were punished by two peak-to-trough crashes of greater than fifty percent.

While all that is true for the S&P 500, there were other areas of the market that delivered excellent returns over the same period of time. Emerging Markets were up 154%, U.S. bonds were up over 80% and U.S. Reits were up 175%!

Source: What Lost Decade?, The Irrelevant Investor ; Hat Tip: The Big Picture

As the title of this post says the key point to remember is to diversify.Failure to diversify can lead to no gain or even a loss after a decade of investing.

Related ETFs:

• iShares MSCI Emerging Markets Index Fund (EEM)
• Vanguard Emerging Markets ETF (VWO)
• SPDR S&P 500 ETF (SPY)
• SPDR STOXX Europe 50 ETF (FEU)
• SPDR DJ Euro STOXX 50 ETF (FEZ)

Disclosure: No Positions

Volatility is back with a vengeance in the US equity markets. In the first two weeks of this year stocks have been extremely volatile with the Dow taking investors on a wild ride.In times of such high volatility patience is a very important factor that differentiates successful investors from others. Panic selling and market timing does not work especially for retail investors.

Selling when the market plunges has a very high cost. Not only an investor ends up taking big losses by selling stocks are at their lows but also loses again when the market recovers strongly since that investor is usually fearful of getting back in. Moreover during panics markets plunge dramatically in a short period and during recoveries they soar violently. These types of moves are hard to predict or catch for any investor. In a collapsing market, even high quality stocks may get dumped along with others making the situation feel like that whole world is about to end. This scenario occurred during the Global Financial Crisis of 2008-2009. Since the lows from early 2009, the S&P 500 has more than doubled.

I recently came across a fascinating article by Ken Fisher of Fisher Investments on why staying calm and trusting one’s gut instincts is so important when markets are declining precipitously. He used the example of the market collapse and recovery in 1998. From the article:

Click to enlarge

In cooler moments, most investors with long-term growth goals agree they should think long term and ignore near-term wiggles. And they plan to.

But amidst volatility, more primal instincts take over – they want to take action to remove the threat of near-term pain, even if it costs them future returns. Again, investors articulate notions such as: ‘Don’t just sit there, do something’. It’s fight or flight. But sometimes doing nothing is best.

Here’s an example. 1998 was a terrific year for world stocks overall – but it was trying for investors. It started fine – world stocks rose 17 per cent by mid-July. But there was fear of contamination from the Asian financial crisis that had started in 1997 and led to Russian debt default.

Debt woes trickled west, pushing huge, super-leveraged US hedge fund Long-Term Capital Management (LTCM) to the brink of default. People feared that if LTCM failed, they could take down the US financial system, and world stocks dropped nearly 20 per cent in just 11 weeks.

But corrections move fast because they’re grounded in sentiment, not fundamentals – and sentiment changes swiftly. People got over their fears, and world stocks finished the year up a big 23 per cent overall.

Investors who ignored their gut and stayed invested were hugely rewarded. Investors who panicked and sold to stop the pain likely sold at a relative low, and probably didn’t buy back in time for the fast rebound. And they had to pay transaction fees and maybe taxes.

Source: Fisher’s financial myth-busters: you trust your gut feeling, Jan 16, 2015, Money Observer

Here is an excerpt from another article on this topic by Saket Mundra of McLean & Partners:

The mantra of ‘Doing Nothing’ stems from my belief in simplicity rather than a claim of its superiority over any other actions. ‘Doing Nothing’ marks a remarkable shift in one’s investment process from selection (finding the best stocks, forecasting the next recession etc.) to elimination (acting only on a small subset of opportunities or decisions). The decision to do nothing places the investor in a position to exploit some of the most powerful anomalies in the financial markets by:

1. Allowing only the best opportunities to make it to the portfolio
2. Lengthening the time horizon as one is not acting on short term noise
3. Minimizing the re-investment risk as the turnover is low
4. Reducing the odds of losses due to insolvency or bankruptcy⁴
5. Lowering the transaction costs and taxes

‘Doing Nothing’ does not imply, nor is it an excuse, for complacency or poor analysis. The foundation of the theory of ‘Doing Nothing’ lies in one’s ability to eliminate mediocre opportunities, or in other words, only acting on great opportunities. The approach does not reward investors for selecting a bad business (or even a good business at a bad price) to begin with. Provided that the bulk of the analytical effort is expended before a stock is even included in the portfolio, ‘Doing Nothing’ affords the investor the luxury of ignoring short-term gyrations and focusing only on the true underlying prospects for the business, which do not change each day/week/quarter. Identifying and sticking with great opportunities not only requires unbiased and factual analysis, but a great deal of behavioral restraint as well. The lesson here is simple – when a set of good businesses are allowed to compound for a long term without intervention, the winners significantly offset the losers resulting in above average returns.

4 Kay Giesecke, Francis A. Longstaff, Stephen Schaefer, Ilya Strebulaev (2011): Corporate bond default risk: A 150-year perspective. Journal of Financial Economics

Source: ‘Doing Nothing’ – The Unloved Alternative, Aug 2014, McLean & Partners

The key takeaway is that sometimes just doing nothing and sitting tight is the most important factor. Keeping one’s emotions in check and being focused on the long-term goal will lead to better investment returns. In today’s world of text alerts, email alerts, 24/7 internet connectivity, smartphones, 24/7 TV news, etc. it is very difficult to do nothing for most of us. But to be a successful investors requires sacrifices and one sacrifice that investors must do during times of market corrections is simply to became a spectator of all the actions and not become a participant.