What’s the Impact of the Greek Debt Crisis On My Investments?

By in Asset Allocation, Bond, Budget, Debt, Economics, Investing

Current Investing Analysis

Will the Greece Situation Hurt My Investments?

As investors, we tend to get nervous when there’s economic upheaval. It’s well known that investment markets are skittish. Markets can drop in a minute after negative economic news.

The Greek Debt Crisis is all over the news. But what are the implications of this global crisis for the average investor?

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Greek Debt Crisis Overview

Let’s get a quick drill down into the Greek Debt Crisis. Then we can look at potential impacts for our investments and finally, what should you, the investor do.

Greek is in debt to Germany, France, The European Central Bank and the International Monetary Fund (IMF).

Athens owes approximately 320 billion euros. During the first week of July, Greece missed a 1.5 billion euro payment to the IMF, according to a recent NYtimes.com article, “The Debt Crisis: What Greece Wants and What  It’s Offering” by Jeffrey Marcus here’s a break down of the situation.

Greece can’t make the payments because it’s almost out of money and Europe won’t lend them any more.

When Greece runs out of money and can’t borrow any more then it won’t be able to pay it’s debts including pensions.

Greece might be kicked out of the European Union. Then the country would have to start printing it’s own money.

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Greece is begging for a three-year loan remediation program. After the three years, they want additional market financing going forward. They previously wanted debt relief, which was not acceptable to the major players in the crisis.

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Europe requests that Greece cut its spending or ‘no deal’.

This week Greece and it’s Eurozone partners announced an agreement in an attempt to resolve the crisis. According to the WSJ.com article, “Greece Approves Austerity Measures” by Stamouli, Bouras, and Stenhauser the Greek Parliament passed the stringent changes required by the Greeks to gain a new bailout. This act led to great conflict among the Greek legislative members. 

This ongoing story will continue.

Possible Impact of the Greek Debt Crisis On My Investments

So how might all this international Greek Debt Crisis upheaval impact your investments?

Impact of the Greek Debt Crisis On My Investments

data source: http://www.nasdaq.com/symbol/spy/stock-chart

The markets hate uncertainty. Systematic risk or market risk is undiversifiable. In other words, you can’t escape from systematic risk or total market volatility. When there are global events, and markets get scared, investors tend to sell, leading to a drop in value.

Diversification will protect your investments from unsystematic risk or events that impact one company or industry. There’s no relief from market risk. This investing concept directly influences the impact of the Greek debt crisis on your investments.

If a resolution isn’t confirmed by all parties, and Greek defaults on its debt, this will likely cause a global market crisis.

Remember the 2007-2008 U.S. debt crisis and mortgage meltdown? Take a look at a chart of the SPDR S&P 500 ETF (SPY) index -a proxy for the overall market index:

Notice the 2009 subsequent drop in the overall stock market in the chart above.

That decline in most stock prices and aggregate market average graphically shows a systematic market risk.

Although the future is unknowable, it’s likely that if Greece defaults on its debt or leaves the European Union, there will be a negative impact on the global investment markets.

But what if the bailout goes through – Greece tightens its belt enough and finds the money to repay it’s debt? It’s likely that the international community and global investors will calm down. Obviously, the future is unknowable.

The Investing Takeaway

Although investors may be curious about the response to the question, ‘What’s the impact of the Greek Debt Crisis on my investments?’, the answer should not affect your investing practice.

It is a fact that stock and bond market investing is volatile. Thus, it’s wise to keep any money you need within the next 5 years out of the markets. 

If you follow this practice, and have set up a well reasoned investment portfolio, in line with your risk profile, then any short term fluctuations in market values shouldn’t impact your investment decisions. 

Stay the course, keep investing through market ups and downs. No one perfectly predicts market cycles and trading in and out of the markets based upon economic news is a recipe for sub par long term investment returns.

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