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The Market Swoon and Greek Contagion--One Advisor's Response

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Anytime the markets react as violently as they did last week my mind switches to high alert. I tune in to see what may be causing the decline and question whether it’s a temporary blip or is there something fundamentally wrong which could lead to a more severe downturn. Although losses cannot always be avoided (unless you’re 100% in cash), I do feel some degree of responsibility to do what I can to minimize them.

To this end, I have been in the process of structuring client accounts in a fashion which will allow flexibility if I should need to reduce the exposure to stocks. Since mutual funds trade at the end of the day and ETFs trade intraday, ETFs are a good investment for this. Here’s an example. Let’s assume I’ve allocated 10% to large value stocks. I might put 50% in a mutual fund and 50% in an ETF. If I believe the markets are headed for a protracted downturn – as I believe to be the case presently, I can sell all or a portion of the ETF to reduce the exposure to stocks and minimize the bleeding. While I will probably never completely exit stocks (with the mutual funds representing the long-term hold), I may want to reduce a particular asset class and ETFs work well for this

Why do I think this “correction” could linger or worsen? In the April issue of my newsletter (free subscription at:, I listed the top 20 indebted nations as ranked by their debt-to-GDP ratio. Eighteen of these countries are located in the euro zone. Greece, which has garnered all the press lately, is a smaller economy and is ranked 16th on the list. This means there are 15 countries with worse debt problems than Greece! If Greece is causing such turmoil with the global financial markets what would happen if one of these other countries (14 of the 15 are in the euro zone) were to need a bailout? Spain (ranked 15th) and Portugal (ranked 10th) are facing debt ratings reductions because of their own debt problems. I believe the European Socialist experiment is finally blowing up. There are simply not enough tax dollars to support their ever growing public sector programs. In other words, I think the ‘you-know-what’ is starting to hit the fan.

On a somewhat positive note, the U.S. economy is improving, but the European problem could impede the recovery. There is also a lot of counterparty risk between European and American banks and that would be enough to take the market averages down several more notches.

Here’s what I’m doing. I am reducing foreign investments (as the dollar should continue to strengthen), getting out of junk bonds, and investing more in U.S. government issues. Although the American fiscal house is also in disarray, it’s in much better shape than Europe’s. Ironically, the U.S. becomes the safe harbor and the investment of choice.

Have a good week!