How Global Crises Affect Your Portfolio
“The global economy remains a treacherous place,” said Greg Ip in The Wall Street Journal. Chinese stocks are plummeting, Greece is in economic turmoil and—closer to home—Puerto Rico can’t pay its debts. What does all this mayhem mean for your investments? The good news is that we probably aren’t facing a repeat of the U.S. housing bubble in 2007 or the European sovereign debt crisis in 2009. Private investors and banks have scaled back their exposure to Greece. China’s financial system, despite its size, “remains relatively closed.” And Puerto Rico’s predicament “has been building for years,” giving bondholders a chance to cut their losses. But “that does not mean the world will be spared.”
Long-term investors probably shouldn’t worry about Greece, said Thad Moore in The Washington Post. “A jittery market can take a wide range of stocks with it,” but the U.S. is more insulated from European turmoil than most other countries. U.S. investors should be slightly more concerned about Puerto Rico, said Jonnelle Marte, also in The Washington Post. Puerto Rico’s bonds trade in the U.S. municipal bond market. While many fund managers have cut back on their exposure to Puerto Rico, a few have actually increased their bets, “making it a good time for people to check where their municipal bond funds are invested.”
“Odds are that chasing Chinese stocks or Greek mutual funds is just a little too risky for anyone in their right mind,” said Suzanne McGee in The Guardian (U.K.). But that doesn’t mean U.S. investors should shun the wider world. With emerging markets making up roughly half of the world’s GDP, there are opportunities for investors willing to diversify and “take a long-term approach.” If all you have is U.S. stocks and bonds, you’ve made a bet that “the current state of affairs is going to endure for the long haul.”
The headlines may be grim, but nobody really knows what will ignite the next big market crash, said Walter Updegrave in Time.com. Fortunately, positioning your portfolio for the next big downturn doesn’t require a crystal ball. Your savings should be invested in a mix of stocks and bonds you’d be equally comfortable with if the market continues to gain ground “or gets whacked for a sizable loss,” whether from a development that everyone anticipates or one that “comes completely out of the blue.” There are free tools available online to check how your asset allocation stacks up against your tolerance for risk. They’ll also show you how your portfolio would have stood up to past downturns. Then you can leave the “endless guessing game” to the pundits.
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