Many of the risks impacting investors are those most investors are already familiar. These risks include inflation, business, market, and interest rates just to name a few. For long-term investors, these risks are generally mitigated or offset through diversification, active allocation and rebalancing, thus rarely play significant roles in a portfolios value.
In recent years, there is a new risk that is playing havoc with investors, especially those who manage their own funds. While the risk really is not new, its impact has become more significant during the last several years. This new risk is what has been termed “Headline Risk.”
Most everyone knows what sells papers or gets the mention on the news is more often the sensational items rather than the less dramatic headlines. As an example: The Dow Jones Falls 250 Points or The Dow Jones Crashes Amidst Turmoil; Greek Citizens Protest New Austerity Measures or Greek Police Fight Back Rioters at Greek Parliament.
Investors must remember to ask the question, “What has changed in the (fill in the blank) to cause this move?” The blank can be filled with economy, recovery or world. The question must be asked, and if not, decisions will be made in a void or with the herd.
This past week the markets moved significantly lower. While a correction is generally healthy for the market’s ability to continue higher, there was more discussion by many of the financial news personalities about the impact Greece may have on the U.S. markets. The steps Greek Parliament is taking is not new and has happened many times before. However, there is one significant difference. In the past, the Greeks would devalue their currency, the Drachma, and the impact of the Greek’s financial woes would have little impact on other nations. With the acceptance of the Euro, the option to devalue their currency is gone. The member nations of the European Union (EU) are now directly impacted by other members’ financial and economic policies.
While Congress is struggling whether there is a company too big to fail, there may be a new question, “Is there a country too big to fail?” The gross domestic product of Greece when compared to the World’s production or that of many U.S. states is relatively small. Therefore, if the Greeks have to cut back on their purchases, will this have a huge impact on the World’s recovery? The more important question facing the EU and especially Germany, since it appears Germany is the strongest financial member of the EU, is whether or not to assist Greece to become sound financially or perhaps, just take over the country? While I am kidding about taking over Greece, significant measures must be taken.
Avoiding headline risk and remembering to ask “why” in the midst of major market moves may save thousands in portfolio values, and often creates opportunities to act upon.
For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.