Superior Investing During the Eurozone Crisis
Katie and I have noticed that there have been a lot of questions in the marketplace concerning how to prudently handle the Eurozone debt crisis.
Let’s begin with fixed income. When we work with our clients and investment portfolios we have criteria and standards for what countries are eligible for owning their government bonds. Here is a list of those eligible countries:
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Japan
Netherlands
New Zealand
Norway
Sweden
Switzerland
UK
United States
Notice which countries are missing. Notably, Greece, Italy, Spain, Portugal and Ireland. This result is due to our fundamental principles for owning fixed income. What is the purpose for owning fixed income? First, it is to reduce volatility, or to reduce risk, in your portfolio because they have low correlations [with equities]. In other words, bonds tend to go up when stocks or equities are falling. Second, there must be something to rebalance against when equities fall. If equities are falling and we own high quality government bonds, we can [sell those bonds] to buy more equities.
To meet those purposes, there are four necessary criteria and standards [to be met]. First, government bonds only – no corporates. In 2008, corporate bonds fell just as much as equities did [increasing risk and providing no opportunity for rebalancing]. Secondly, those government bonds should also be high quality – double AA rated or higher with short maturities of 5 years or less. Lastly, global diversification [reduces risk] as US government bonds trade differently from other international government bonds.
Now, let’s speak a little about equities. When you add up the market capitalization of Greece, Italy, Spain, Portugal and Ireland, it represents roughly 3 .5% of all international stocks. When we speak with our clients, the narrative becomes even broader because we have them in globally diversified portfolios where the market capitalization is allocated roughly 60% to the US, all countries excluding Greece, Italy, Spain, Portugal and Ireland representing about 39%, and those 5 countries in question combined only representing about 1.5% of their equity portfolio. It makes one wonder, “Why all the hype in the media if people are prudently diversified?”
What does this all mean to you, the investor? Producing wealth requires a fundamental strategy. Number 1 is to own equities. Only equities will protect your purchasing power over long periods of time. Number 2 – stay fully invested. There will be downturns and down markets, but the only way to capture the upside and the risk premium for owning equities is to stay fully invested. Number 3 – is to globally diversify. You want to own the entrepreneur power and thinking of literally tens of thousands of companies scattered across the globe as opposed to owning only a handful. Last, but not least, is buy low and sell high. The systematic way to do that is to rebalance your portfolio on continuous basis. These are the fundamental strategies to employ. Remember, your survival is on the line.
Tags: certified financial planner winter park, david witter, Europe debt crisis, financial harvest wealth advisors, investment strategies, katie miller witter, winter park certified financial planners, winter park investment advisor, world debt