Perspective on the Eurozone Crisis

With the Euro crisis now in its third year, most of the media continues to focus on the “bad” news. Why? Because human beings don’t like bad news. It makes us feel uncomfortable and the media plays on this very notion. It is what gains the attention of readers and viewers. CNBC knows viewership would decline if they led programming with stories focusing on how Australia, New Zealand and Sweden have actually been flourishing during the past 2-3 years. And that is exactly what’s been happening, but you would be hard-pressed to find this “good” news as it gets buried behind page-one headlines.

The primary lesson from this crisis (and all others) is that capital markets are and always will be risky. This can be scary for investors, but without risk there would be no reward. Risk and return are related. One of the biggest mistakes and investor can make is selling when risk shows up and not be invested when the market rebounds. This is why we believe it makes sense to have a globally diversified investment portfolio. While you might have exposure to Greece, Spain and Portugal, you will also have exposure to Australia, New Zealand and Sweden. Will Greece and the like always be down? It’s highly unlikely. Will Australia and the like always be up? It’s highly unlikely. And that’s the issue. No one knows when it’s the right time to have exposure to certain countries, stocks, or sectors. If they did, why would they want to share that information with the public?

The concerns in Europe, just like the 2008 sub-prime crisis and 2011 debt ceiling crisis, reaffirm the following fundamental principles practiced by prudent investors:

    1. Have a well thought out investment plan

Work with an investment fiduciary to create and adhere to an investment plan that considers your ability, willingness and need to take risk. Events such as the Euro zone crisis are built into well-reasoned investment plans. As Napoleon Bonaparte stated, “Most battles are won or lost (in the preparation stage) long before the first shot is fired.

    2. Focus on your long-term investment plan, not short-term events

The impact of the Euro zone crisis is generally unknown. History shows that, in the long run, such events are blips on the historic timeline. In 1976, investors obsessed over fear of inflation and a dysfunctional economy – sound familiar? The Dow Jones Industrial Average traded between 800 and 1000 and many financial gurus declared the “death of equities.” Today, despite the events of 1976 and many other “crises” along the way, the Dow trades around 12,000.

    3. The media wants you to worry

Always remember that the media’s job is not to provide sound investment advice. Their job is to make people tune in to watch their TV show or buy their magazine. They accomplish this by playing on individual’s emotions and instilling fear that you must take action or else. Its one thing to watch the news to stay informed and another to let it change your long term plans.

If you find yourself worrying about how this most recent crisis will affect your portfolio, you likely do not have a well thought out plan or you were overconfident about your ability to deal with bad news. If the former is the case, then you should develop a plan. If the latter is the case, you should revisit your plan. More specifically your ability, willingness and need to take risk because this likely won’t be the last crisis you (and your portfolio) will have to deal with.

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