It was a shock this morning to learn that Greece had pulled the rug from under investors’ feet, introducing fresh uncertainty, by saying it would hold a referendum on a crucial European debt deal that markets had considered a fait accompli.
Investors were stunned by the decision to turn over to a general referendum what had largely been regarded as a done deal to save Greece from bankruptcy.
How ever upsetting it may be, Bank of Canada Governor Mark Carney said the Greek government is right to seek broad democratic support on whether it should accept the financial-rescue plan on offer from its partners in the euro area, so he respects Prime Minister George Papandreou’s plan to hold a referendum. Mr. Carney notes that it is “imperative that there is widespread support” for tough decisions to implement major fiscal austerity measures, because they will unfold over a long period.
What does that mean for you?
It means that we are stuck in a lot of uncertainty, that more volatility lies ahead and we are unlikely to see big gains in a the very near future. Things will improve when we have certainty. Assuming the referendum goes ahead and the Greeks accept the terms of the bail out we will have certainty. Should the Greeks reject the terms of the bail out we will have uncertainty. Some observers feel that German and French and other European leaders took important steps last week to make a Greek default and departure from the Euro zone survivable. Tanja A. Borzel, professor of European Union politics at the Free University of Berlin says “they essentially hammered out a procedure for an orderly sovereign default”.
You might ask: Should I get out now and back in next year then?
No because markets react very quickly, we are at an all time low and it would be too risky to get out and miss the come back. When it feels better, it is already too late to go back in. It is safer to stay the course. Think about March 2009 when markets unexpectedly started to rally. This is typical of recoveries. Here is a graph showing the cost of missing the best few days of a recovery.
Odette, I understand all of this but I just got my September 30 statement and I can’t take this anymore, let’s reduce risk?
First of all, we had a record October . The MSCI World Market Index was up 13.6%; the U.S. S&P 500 climbed 10.8% and Canada’s S&P/TSX rose 5.4%. So your market value would be up from that September 30 statement. It is typical for an investor to feel as you do when the outlook is bleak. We all want to be aggressive with our investment strategy when the market is doing great and safe when it is not. To enhance returns and reduce risk, we need to do the exact opposite.
Here is a great article I posted on our blog last week:
Here are my favourite quotes from this article:
“Every time the market correction occurs, people starts second guessing themselves….While everyone knows they should buy low and sell high, the lower the price drop, the more people bail on that strategy, and essentially turn into buy high and sell low investors….The odds of becoming a successful trader are similar to becoming a professional athlete…. The likelihood of a regular investor dumping their prudent strategy to try to beat the markets consistently through market timing and trading is about as wise as the average person dropping their careers to take a shot at making the NBA”.
“The truth is a well-diversified portfolio backed by an investment policy statement is going to be the most prudent approach to investing for most people.”
Please make sure to come in annually to review your plan and then, stick with it. It is the best strategy in any given market or economical environment.
Please do call or email if any questions or concerns or want to meet to review your situation. We will keep you abreast of the latest developments.