Amid all the financial uncertainty created by the European debt crisis, what's an everyday investor to do? That "Ask the Experts" question gets answered this week by investment manager Jonathan Lederer, owner of Lederer Private Wealth Management in Sacramento.

To see more of his advice or to ask your own questions of our other local experts on taxes, personal finances and wills/trusts, go to www.sacbee.com/ask.

With all that's going on financially in Greece, Italy, Spain and Ireland, should investors avoid or pull back on investments with European holdings? What kind of investment strategy do you recommend in light of the European debt crisis?

Like most investors, I am concerned about the uncertainty in Europe and its impact on the global financial markets. There are obviously no easy solutions to the crisis, which is structural in nature. The only thing that seems clear is that austerity measures in peripheral countries and likely bank recapitalizations could lead to a European recession and a depreciating euro currency.

While the stock markets have rallied recently on hopes that European policymakers will unveil a plan to meaningfully address the crisis, the concurrent decline in French and Italian sovereign bond prices shows a lack of faith that a solution is at hand. At the extreme, there is the possibility that a disorderly Greek default could trigger a banking crisis more severe than what occurred after the 2008 Lehman Brothers bankruptcy. Sadly, investors cannot rule out this scenario.

As far as investment strategy, I have avoided European stocks in client portfolios since early this year and do not intend to re-enter positions until there are more favorable trends in European credit markets. While one could argue that European equity valuations are relatively attractive, I do not believe the potential rewards outweigh the current risks.

Investors looking to bet against European markets have several options among exchange-traded funds (ETFs). First, there is ProShares UltraShort MSCI Europe (ticker EPV), which takes a short position in the Morgan Stanley Capital International (MSCI) European equity index. By going short, an investor makes money if the price declines.

There are also two ETFs that are short plays against the euro currency. The first is the Market Vectors Double Short Euro ETN (ticker DRR); the other is ProShares Ultra Short Euro (ticker EUO).

Keep in mind that all three of these holdings are not for the faint of heart, as they are leveraged and can experience severe declines if European stocks and/or the euro currency increase in value.

If history is any guide, European stocks may become a most attractive asset class once investors have a clearer picture of how the European debt crisis will play out. Following the Asian financial crisis in 1997-98, Asian stocks generated substantial returns and were among the leading global equity markets in the ensuing six months. And not long after the Lehman Brothers debacle, U.S. stocks rebounded by more than 50 percent over the next 18 months.

Unfortunately, given the dynamics of the European debt crisis and the track record of policymakers thus far, we may be waiting quite awhile for clarity.

– Compiled by Claudia Buck

© Copyright The Sacramento Bee. All rights reserved.