With Greek default imminent, what’s next? Investing when the sky is falling is a stomach-churning exercise. You have to have faith – in yourself, your investment managers and your plan – as well as a medicine cabinet filled with bottles of Tums. But really, what does the impending default do to your long-range investment plan? What does any bad news do to your bottom line?
Yesterday, global markets plunged with the breakdown in talks over how to resolve Greece’s ongoing fiscal crisis. This will not likely change over the next couple trading sessions leading up to the Greek ballot initiative scheduled for the July 4 holiday weekend. Whatever happens, investors and traders will likely return to their offices next Monday to deal with the aftermath of that vote.
While Greece has been at the top of the news there were other troubling signs as the governor of US territory Puerto Rico announced that they would not be able to pay their debts as scheduled. And after seeing their domestic stock market increase by more than 100% in a year, China’s stock market saw a huge correction.
So, the best conclusion after reading these tea leaves and being hit on the head by that proverbial falling acorn: Head for the Hills! Sorry folks, you won’t hear me saying that. Other commentators may but I won’t be.
I’ve seen too many crises and inevitable rebounds with investors huddled on the sidelines missing those upticks. Reacting to the daily noise in the markets can be fatal to your long-term financial health. On the other hand, you can’t ignore the weather either. Implementing a well-considered risk-management plan is just plain prudent.
Just because it’s raining doesn’t mean you don’t protect yourself from getting wet. Same can be said for investing.
This is why I strongly urge clients in retirement to hold a bucket of cash, money markets, CDs and ultra-short term bonds equal to fixed overhead for one to three years of lifestyle expenses. This is also why I’ve been holding or increasing cash positions in almost every other client account. Yes, cash doesn’t earn a lot and can be a drag on portfolio performance but let’s face it: You don’t have to have your portfolio recover so much if it doesn’t lose so much in the first place.
My crystal ball is forecasting ‘cloudy with a chance of meatballs’ and isn’t giving me a good read on the next market move. This is why I feel that clients get ahead when they actively protect their nest eggs.
You can protect your nest egg when you have a plan. If you know where you need to be, then it’s easier to stay on course or make corrections without succumbing to emotions.
You can protect your nest egg when you diversify. Research and common sense still show that you’re better off when you don’t have all your eggs in one basket.
You can protect your nest egg by holding cash. As I noted earlier, it may not be the best-performing asset class except when everything else around it is going down. And cash is one of the few assets that won’t be correlated to anything else that could drag it up or down in reaction to market swings. There’s value in ‘keeping your powder dry’ to fight another day or take advantage of opportunities when investments go on sale after a market correction.
You can protect your nest egg when you use alternative investments and hedges. You need to include investments in your line up that zig when other things zag. This is why I’ve incorporated Master Limited Partnerships (MLPs), gold and real estate as hedges against inflation. This is also why I’ve incorporated low-volatility and alternative stock ETFs like the PowerShares S&P Invernational Developed Low Volatility ETF (IDLV) and PowerShares Large Cap Core Plus (CSM) or PowerShares S&P 500 Buy Write (PBP), a covered call strategy, to counter some of the effects of a volatile stock market.
You can also protect your nest egg when you employ a dynamic investment strategy. Instead of simply following a ‘buy-hold-pray’ strategy or a more emotionally driven approach reacting to your baser instincts of greed or fear, I recommend using a more rules-based approach to investment changes. Following a rules-based model means that you go beyond simply rebalancing to target weights for asset classes. Instead, markets are monitored and when underlying trends up or down are identified, you’re having your assets shifted in and out of cash or other investments so you can participate on the upside while minimizing losses. You can get a better idea about the details of this type of approach and view the research by clicking on the links under ‘Investment Philosophy and Research’ here.
Now, did using all of these approaches mean that clients did not get impacted by the news yesterday? Nope. When there’s a monsoon, everything is going to get wet. But you don’t want to drown.
As to the news coming out of Greece, this is going to continue for a while even if some sort of compromise is achieved. Why? This is a structural problem that goes beyond Greece. As economics commentator John Mauldin notes in his newsletter of June 27 under ‘Shoot the Dog and Sell the Farm’,
“You cannot have a monetary union without having a fiscal union, and a fiscal union is incompatible with the notions of sovereignty in nearly every European country, especially the larger ones. There has never been a monetary union that was successful without fiscal union.”
It’s not just about Greece. Europe got itself into this mess. The larger, more-industrialized countries like Germany exported their way to success by selling their goods to the countries of southern Europe. This contributed to massive trade deficits. And all of the ills ascribed to Greece affect the other southern Eurozone countries like Italy and Spain.
In the near term, expect it to be painful. The Greek Government, which came into office on a promise to fight further austerity measures, is between a rock and a hard place. No business or government has EVER cut its way to economic growth and prosperity. And pushing back against the big banks is just a popular thing to do. As one protester I heard on the radio say, “What do I have to lose? I’m unemployed.” That sums it up for many who are in a lost generation of almost permanent recession.
The right thing to do was back in 2010 at the beginning of this this slow-motion car crash: Write down the debt and move on. But just like the US when our housing bubble burst, no one wanted to take this step. So while the bankers were spared, homeowners here in the US and now the Greeks are paying the price.
As sad as this is for the Greeks and as dangerous as it may be for investors, there is a reality we must recognize. There will always be crises. And long-term financial goals cannot be hostage to near-term noise and news. We all have to live with fear and uncertainty in life – and investing. We don’t have to be ruled by either but we can be watchful. So protecting your nest egg using these approaches is the prudent thing to do.
