You have probably seen the news coverage about the Greek debt crisis, and have wondered what impact it may have on your investment portfolio. As with previous global events, the media is quite good at stirring up fear, because their goal is to capture your attention. However, when it comes to long-term decisions about your financial future, you need as much sound and objective information as possible.
Greece missed the International Monetary Fund debt payment of nearly $2 billion. Its nationwide referendum July 5thconfirmed that 61% of Greeks reject creditors’ austerity demands that would require pension cuts and an increase in the value-added tax. This could pave the way towards Greece exiting from the Euro Zone, but a compromise between the country and the International Monetary Fund is still possible. Many Greek citizens have been making runs on the bank to withdraw their deposits. In response, the Greek government has closed the banks and stock market, and have limited ATM withdrawals to 60 Euros ($66) per day.
The reaction of the European stock market has been relatively modest. Economists have mixed opinions on whether losing the weakest country in the European Union would help or hurt the currency.
How do these events affect your investment, if you have a broadly-diversified portfolio? To put things in perspective —
* Because globally-diversified portfolios spread their risk to all parts of the market (just the opposite of putting all your eggs in one basket), your direct investment in Greece would probably be very low, about 1/100thof 1%. For example, if you had a $1 million investment, your exposure to Greece might be about $85.
* Greece historically has been a fragile economy. Greece has been either in the process of rescheduling its debt or been in default 51% of the time since 1800. This is one of the reasons diversification is so important, to avoid losses due to a single country, sector or industry.
* The media are often wrong. Back in 2012, many media analysts considered Europe the worst place to invest because of the severe debt crisis, the potential breakup of the European Union, and the potential collapse of the Euro. Nevertheless, the MSCI Euro Index posted a stunning 23% return for 2012.
The reality is that we live in an uncertain world. Uncertainty (while uncomfortable) is a natural part of investing, and is why we receive such good long-term returns from the market.
In our quest for certainty, some of us may be tempted to make changes to our portfolios based on headlines or market forecasts. In most cases, however, you would be better-served to stay focused on your long-term investment strategy and avoid impulsive moves based on hunches about the future.
The global and U.S. economies are very resilient. Even if Greece returns to the Drachma, we believe that any fallout can be contained to Greece.