Before reading this, watch the video…It’s only 81 seconds long, so just play along.
Did you watch the whole thing? How many did you count?
Now I know you’re thinking, “What does this have to do with investing?” In one word: Everything. In the information age, we are inundated with news and headlines from around the world every second of every day. The problem is that information is just that: information. As Albert Einstein so succinctly put it, “Information is not knowledge.” Today, June 29, 2015, the Greek banks and stock markets are closed, there are regulations on how much can be withdrawn from ATMs and they cannot transfer funds out of Greece in an effort to keep the banks capitalized. So what does this information mean to investors in the short and long term?
In the short term, I would expect heightened volatility in both the equity and fixed income markets. We’ve had similar shocks to the system since Greece started making the headlines and the markets have carried on. S&P Capital IQ published a study after analyzing 70 years of historical data on the markets. What they found is that events such as this “produce an average decline of 2.4% on the next trading day, which is recovered in an average of 14 trading days (CNBC).” Using history as a guide, we could see a very similar pattern yet again.
In the long term, this is where the video comes in. If we are so laser focused on one thing, we miss out on other significant details. What if the instructions on the video were different? What if it just said to watch the video and explain what happens? Do you think you would have seen it? The global economy is not comprised of Greece only. In fact, Greece makes up 0.3% of the entire world’s Gross Domestic Product (GDP). So if we focus on Greece and not look at what’s happening around the globe, there’s going to be a gorilla in the room and you won’t know how it got there. And Greece is just the recent example…one week people are worried about rising interest rates, the next they’re worried about municipal defaults, and then it’s falling oil prices…pick your threat and you’ll find that if you are building an investment plan on the premise that one thing is going to go wrong, you won’t be able to see the forest for the trees.
It’s never pleasant experiencing these hiccups in the markets. No one knows how this will ultimately play out, but my thought is once a solution is in place, the markets will carry on. If these headlines are making you anxious, then maybe it’s time to take stock of the risk in your portfolio. Let us know how we can help.
Until next time,
LPL Wealth Advisor
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
All investing involves risk including loss of principal.