Greece’s plan to ask voters whether they will accept debt-payment terms offered by international creditors helped to push down stock markets worldwide, but investors haven’t hit the panic button and abandoned stocks altogether.
The Dow Jones Industrial Average sank 2 percent, or about 350 points to 17,597, on Monday after global markets sold off on concerns that the Greek financial crisis would negatively affect other countries. The decline meant that stocks were down for the year.
Investors have had several years to prepare for the possibility that Greece would default on its debt and exit the European Union, while the European Central Bank has undertaken an record-setting stimulus plan to help the region’s stagnant economy.
The Greek situation was “not a ‘black swan’ moment,” Holger Schmieding, chief economist at Berenberg Bank, wrote in a research report, according to the New York Times
. “We expect contagion control to work, by and large.”
Greece’s national debt is about $360 billion, or about 177 percent of the country’s annual economic output. The country owes a payment of $1.7 billion by June 30 to creditors including the European Union, International Monetary Fund and European Central Bank.
Mutual funds that invest in European stocks are raking in investor money, as measured in fund flows data. EPFR Global said flows into European equity funds are more than $70 billion so far this year, according to reporter Suzanne McGee
writing for the Guardian newspaper.
“This isn’t the first time that we’ve had a Grexit panic,” she writes. “Three years ago, headlines about an imminent Greek departure from the eurozone sparked fears that the euro itself was doomed, and left U.S. stocks in the doldrums for most of the summer.”
She cites several things to consider about overseas investing:
- Foreign Exchange Risk. A stronger dollar means that converting foreign profits into U.S. currency can erode any investment returns.
- Volatility. As China has demonstrated this year, emerging markets can turn south quickly. The Shanghai Composite Index dropped more than 20 percent into bear market territory after hitting a peak on June 20.
- Asset Allocation. Emerging markets make up half of the world’s economic output, but many U.S. investors keep their money in domestic stocks, bonds and funds. “It’s not that you need to have half your portfolio invested outside the U.S.,” McGree Writers, “but if all you have in it is US stocks and bonds, then you’ve made a long-term bet that the current state of affairs is going to endure for the long haul.”
- Market Timing. Trying to time the market is very notoriously difficult, making long-term investing a better way to manage holdings. “Growing volatility and uncertainty that makes these markets so nerve-racking to consider investing in may also create a set of opportunities for someone who approaches the question from a disciplined perspective,” she writes. “Someone who is willing to diversify her portfolio and take a long-term approach.”
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