This line from a classic R.E.M. song from the 1990s sums up my feelings on this whole Greek Fiasco. While there is a strong possibility for “short-term volatility” a.k.a. a sudden scary market plunge, on the whole the news from this beleaguered isle means little to my clients’ long-term financial plans. Creating a portfolio without planning for these types of events to happen from time to time would be insane.
A globally-diversified portfolio will ride out this storm, just as it has ridden out others that were much, much worse. While this might not be exciting or sexy, a low-cost global allocation made up of mainly of index funds will hold down the fort. The foreign stock component will perform badly and the U.S. stock allocation will lose value. On the bright side, the high quality Treasury bond section will most likely go up and, as always, the cash component will be there as an opportunity fund to take advantage of price declines.
Overall, the portfolio will decline but not nearly as much as the screaming media pundits will lead you to believe. In the end, if your investment time frame was properly considered and your short-term funds are protected, there is no reason to fear the reaper. Here are ten reasons why there is little cause for concern over this latest crisis if you have a globally diversified portfolio and a long-term time frame:
1. Stuff happens. – According to Josh Brown there have been 27 corrections of 10% or more since the end of World War II. The average decline has been 13.3% and took about three months to play out. In other words, bad stuff happens in the market quite a bit. The good news, according to Brown, is: “Most corrections do not become crashes and every single one of them turned out to have been great buying opportunities.” If you subscribe to Ben Carlson’s philosophy of “knowing what you own and why you own it,” you will think of events like these as part of the ball game, and view them as buying opportunities (instead of getting anxious).
2. Time frame matters. – If you are investing for the long term why should this “crisis” occupy any of your time? In ten years, none of this will mean anything and will be long forgotten. The media will have moved on to the next country about to cause the world’s financial system to collapse. Imagine you are planning a trip to Greece. You plan to leave June 29, 2025. Would it really matter what the weather was at Kennedy Airport tomorrow?
3. This isn’t Greece’s first time at the rodeo. – Again, according to Mr. Brown, Greece being in default is actually the norm rather than the outlier. In the last 200 years or so, Greece has been in default about 50% of the time. Brown says, “…being told that Greece is on the verge of a default is like hearing Dean Martin is on the verge of a martini.” Actually countries much bigger and more important to our financial system (like Argentina and Russia) have defaulted over the last decade or so. If you are reading this, you are still alive and these much bigger events were just blips on a screen when you consider the big picture.
4. Never let a good crisis go to waste– This quote, attributed to Chicago mayor Rahm Emanuel, is very fitting to our current predicament. Most investors are woefully under exposed to foreign stocks. They suffer from something called home country bias, which means they own too many stocks from the country they live in. This foreign crisis will give you an opportunity to rebalance your portfolio into an asset class that most consider to be undervalued compared to the U.S.
5. Time in the market is what counts. – Many people believe trying to time the market’s peaks and valleys in order to avoid big drawdowns, and run with the raging bulls is the way to go. Nothing could be farther than the truth. Market timing is a sucker’s game because you have to be right twice: right on when to get out and right on when to get back in. The famed investor Peter Lynch once said, “More money has been lost trying to avoid recessions than the actual recessions themselves.” Staying in the market when the times are bad is the key to investing success. As Jason Zweig once stated, “In investing, only the survivors get paid.” In a startling bit of research, Eddy Elfenbein determined over the last twenty years the 24 best days of market returns accounted for basically the entire gain of the S&P 500 over this period!
6. What a great time to lower your taxes! – Take advantage of market downturns by selling your losing positions and repurchasing similar ones thus avoiding the “wash sale” rules. This will enable you to do two things: You can claim a loss of up to $3,000 to offset much bigger unlimited gains. It also enables you to participate in the eventual rebound due to your purchase of a similar, but not exactly equal, security. This is a much better strategy than panicking over things you have no control of, or by being glued to CNBC and listening to their ever-present drama queens freak everyone out. Remember, they know you will pay three times more attention to bad news rather than good.
7. Betting on the end of the world means you lose even if you win. – Shorting the market is not a very smart strategy since it goes up most of the time. Your upside is limited because stocks cannot go lower than zero. In every single 20-year period on record, the market has not lost money. The probabilities of things working out are pretty high. In the end, even if you bet that the world will collapse and win, who will you collect from?
8. Party on Garth! – With the world in an unsettled place, the world’s central banks will be even more reluctant to take away the punch bowl. This means the United States may delay their rate hikes while our global partners cut theirs more than expected. With rates so low, TINA will continue. There is no alternative to stocks because other investments provide a negative return when inflation is taken into account.
9. Club Med Europe, here we come! – While the Euro will most likely go down further with all of this turmoil and uncertainty, there is a bright side. Everything may get super cheap in Europe for a while if you are a holder of the dollar. Planning on traveling to Europe? You may be able to purchase 10-20% more with your money in the near future. If you are really daring, you might want start investigating some Greek Islands. They could sell for a 50% discount or more if the Drachma is reintroduced.
10. Greece is really, really, small – In the words of Cullen Roche, “Greece’s IMF loan that they may default on is the size of Wal-Mart’s revenue every 36 hours.” He also stated, “Their total output is about the size of Louisiana’s.” Less people live in Greece than in the NY metropolitan area. While things can have a habit of spreading, creditors have had about 6 years to prepare for a possible Greek default. As the hipster cannibal, Gareth, from the Walking Dead said to his unfortunate hostage, Bob, as he was barbequing one of his feet, “Perspective Bob, perspective.”
While the next few days, or months, may be rocky ones for the market, we have seen this movie before. If we can survive, two world wars, a nuclear arms race, genocide, global pandemics, and worldwide economic collapse during the great depression, the probability of making it through this crisis seems pretty good. Eventually every storm runs out of the rain and the sun returns. Move on, nothing to see here.