What Greece Means To Investors

Yesterday, the stock market took it's biggest nosedive this year. The Dow, S&P 500, and Nasdaq were down 2.0%, 2.1%, and 2.4% respectively.

Fears over Greece's inability to repay its debt and possible exit from the Euro sent U.S. stocks back to their beginning of the year values. All ten sectors of the S&P 500 were down, and every single stock in the Dow lost value.

This blog post will address what's causing the situation in Greece, as well as what this means for globally diversified portfolios.

So What's Greece's Problem? Simply put, they borrowed too much money and can't repay their creditors. Back in February, 2015, Greece agreed to economic reforms. However, a combination of Greece's inability to execute on those reforms as well as the reforms themselves not solving the issues have reached a breaking point.

Early next week, bailout dollars will have dried up. At this point, a default on those debt repayments looks likely. But, you never know. A restructuring towards extending their term and reducing their interest costs could still happen.

As of last weekend, negotiations between Greece's politicians and its' creditors stalled out. The Greek Prime Minister called on Parliament to vote whether they should take a deal or not. The final vote is scheduled for July 5th.

What Creditors Want From Greece. The only way the International Monetary Fund (IMF), The European Union (EU), and the European Central Bank (ECB) can be made whole is if Greece commits to reducing government spending, cutting pensions, and raising taxes. That is the deal.

Greek Politicians Have a Dilemma. If the Greek Parliament accepts this deal, their time in power is over. They will be replaced, representing a major disruption to the status quo. In the long term, replacing the powers that be will be a good thing. However, history teaches us that a usurping of power never comes without consequence.

If they don't accept the deal, Greece will undoubtedly get the boot from the Euro. Europe doesn't want that. The Greeks don't want that. But will the Greek's budge on committing to the reforms? Probably not. It seems as they're trying to keep their citizens happy while postponing necessary but inevitable fiscal reforms.

Does a Greek Exit From The Euro Really Matter? Depends who you ask. The Wall Street Journal's Paul Vigna on today's This Morning With Gordon Deal podcast suggests a possible ripple effect. If Greece leaves the Euro, Portugal, Spain, and Italy could follow. Collectively, that's enough for the Euro to become less valuable. If the Euro loses value, Europe's already difficult climb out of recession becomes even harder.

Brian Westbury of First Trust takes a more narrow view in his commentary Ignore Greece. His argument is that investors shouldn't blink. "Greece is not Lehman Brothers. It's like Detroit". When Detroit went bankrupt, Michigan and the U.S. dealt with it just fine. He believes letting Greece default won't cause enough blowback to severely affect the IMF, EU, or ECB.

It Doesn't Matter Who's Right. Remember, these guys get paid for their opinions. Opinion drives emotion. Enough emotion can drive action. This is why the stock market gyrated such as it did yesterday.

The stock market is a massive information processing machine. Based on the relevant information at any given time, markets move up or down. It doesn't matter who's right because Monday's stock declines will probably rebound once more information is known. As I've always said, markets usually react negatively to unknowns.

The Greek Situation Shouldn't Dictate Any Portfolio Moves. No one is smart enough to consistently predict how world events will drive market prices. An investor who sells all their European denominated investments could just as easily be right as they could be wrong. Today already proved yesterday's seller a fool.

Even if a few countries leave the Euro and our international investments suffer, the pain will likely be short lived. You're not going to cash out 100% of your IRA tomorrow. Even if your international exposure takes a hit, it will rebound by the time you expect to exhaust your portfolio (unless your investment horizon is only 1-3 years). Trying to outguess the market based on financial headlines is far more risky than staying committed to your long term investment plan.

I guarantee amateur and professional investors are reacting to the current news. They are making a mistake. History demonstrates that market timers rarely get both the sell and the subsequent buy timed perfect. You're better off staying discliplined by sticking to your asset allocation.

Feel Free To Call or Email Me If You Have Questions. I'll gladly help you understand why maintaining a globally diversified portfolio always makes sense for a long term investor.