Every week in this space I take a reader question and answer it. This week, rather than taking a single question, I’m going to answer one that’s on everyone’s mind – or should be. Namely, is the debt crisis in Europe going to cause the collapse of our stock market and send the U.S. into a double-dip recession?
If you have money in the stock market, either inside or outside a retirement plan, this is obviously an important question. But even if you don’t, it’s still important. Because if the Greek debt crisis turns into a continent-wide unraveling of European economies, there’s little doubt that the effects will be felt on Main Street as well as Wall Street. Europe is a major force in the world economy, and a recession there will almost certainly trigger one here. That means layoffs, further federal deficit issues – even a worsening housing market.
Why Greece’s problem may soon become yours
I wrote about the Greek issue a few months back in a story called Why Greek Debt Matters. From that story…
At this moment, Greece matters to the global economy for three reasons…
1. It’s part of the European Union. Because Greece is part of the European Union, it’s linked to other member nations in many ways, not the least of which is their common currency, the Euro. So when Greece has trouble paying its bills – which it’s had for more than a year now – other countries in the EU are forced to bail it out to protect their own economies and currency. Greece now owes lots of money to big banks and governments of other member countries. If it can’t pay it back, those countries and banks could lose billions. Result? Banks stop lending, require bailouts from their respective governments, and the entire European economy grinds to a halt. And while Greece may not be a huge trading partner of the United States, the European continent is. Our nation depends on exports to create jobs. A recession in Europe could send our unemployment rate up and our stock market down.
2. The crisis could spread. If one country defaults on its debt, who’s to say another won’t? If Greece reneges, investors will shy away from the debt of other weak European economies, like Spain, Italy, and Ireland. Even the debt of stable countries like the U.S. might start looking riskier. And when things get risky, bond buyers demand higher interest rates: bad for struggling economies. Think of it this way: How do you think it would affect our housing market if mortgage rates suddenly went up by a percent or two?
3. Investors are looking for a reason to freak out. Even before this particular problem, the economic recovery both here and abroad was looking fragile. As I mentioned in my post last week, Investors Take Warning: Storm Clouds Gathering, there are already some serious headwinds out there, from rising unemployment to falling home prices. For many investors, the European debt crisis is the final straw.
Since I wrote that back in June, things have gotten worse. From this Reuters News story I read Sunday…
“Doubts are running high that Europe’s politicians can deliver a rescue program big and bold enough to stop its sovereign debt crisis from morphing into a major financial disaster.”
To read more about the crisis, check out this article from CNN/Money.
So why aren’t you selling?
As you know if you’ve been a Money Talks reader for any length of time, I maintain an online, real-money portfolio of my personal stock investments. I’m strictly a long-term investor. As you can see by looking at my portfolio, since I bought my first stock back in 2008, I’ve only sold one, and that was because I had no choice: It was taken over by another company.
Earlier this year my portfolio was worth north of $200,000 – as I write this, it’s closer to $175,000. Since I saw trouble ahead months ago, why didn’t I sell and preserve those profits? Three reasons…
1. I’m not smart enough to know when to buy back.
I bought 400 shares of Apple in my IRA about 10 years ago. Split-adjusted price? About $8 a share, for a total investment of about $3,200. Apple is now around $400, so those same 400 shares are worth $160,000.
Too bad I don’t own all 400 of them any more.
When it became apparent that our economy was going in the dumper a few years ago, I wisely sold 200 shares of Apple at $165 a share. I say “wisely” because in the market collapse that followed, Apple went as low as $88. But did I buy back my 200 shares at the bottom? No. In fact, I didn’t buy them back at all. Which means that instead of 400 shares worth $160,000, I now own 200 worth $80,000.
Apple is still the biggest winner I’ve ever had the good luck to stumble upon, but the point is that market timing requires you to know two things: when to sell and when to buy. Now is probably a good time to sell, and if I were in retirement mode, I probably would. But I’m only 56 – nowhere near retirement. So when the going gets tough, I’m more likely to adjust my expectations than my portfolio, because sooner or later things always rebound and I want to be in when it happens.
2. Crisis may be averted.
I’ve heard and read a lot of people way smarter than me saying that a Greek default, along with a global recession, is nearly inevitable. But if it doesn’t happen – if someone or something rides to the rescue at the last minute – the market could take off like a rocket. I don’t want to be on the sidelines if that happens.
And in fact, the market was up yesterday in anticipation that the European Central Bank was going to come up with a rescue plan.
3. I’m not “all-in.”
While I have what I consider a lot of money in the stock market, I have money that’s not in the stock market too. I always do – the stock market is too risky a basket in which to place all one’s eggs. As the market nearly doubled from its 2009 lows, I was hating myself for not having been more heavily invested. Now I’m glad I kept some powder dry. In short, if everything goes to hell, I’ll buy more.
Bottom line? As I’ve been saying for months, now’s not the time to invest big in stocks. If you’re concerned, that shows you’re paying attention. You should be. So keep an eye on the news, and if you’ll lose sleep over a decline in the stock market, take some money off the table.