The NorthFork View

It seems a Spanish greeting might be appropriate for this update since it appears Spain is the latest of our European cousins to find their backs against the wall.

Without delving into too many details, it seems the European currency crisis is “not dead yet,” to say the least. I have included a link to an article from Tatjana Michel, who is Director of Currency Analysis at Schwab, entitled, “Europe’s Currency Crisis: A Look At Possible Scenarios.” The key takeaways are that an orderly exit of Greece from the Euro is possible, if not likely, and that there is some risk of contagion to other countries like Spain, Portugal and Italy, not to mention the broader financial markets. And while “there is some evidence that the market is pricing in a small degree of contagion risk,” the extent to which the equity markets have priced in the risk of a European contagion has yet to be determined.

Since our last update in early April, we’ve seen the U.S. equity markets retreat from a high of 1422 on the S&P 500 index to a low of 1274 just last week. Analysts are suggesting the combination of ongoing stagnation in the U.S., fears that the U.S. may not have the political will or ability to solve its own fiscal problems, and concerns over a repeat of 2008 with a European twist, have driven global equity markets lower. Conversely, yields for U.S. Treasuries have set record lows and have kept mortgage interest rates (which are roughly tied to the 10-year Treasury) at all-time lows as well. These issues do not appear to be going away anytime soon, and likely will not be resolved either quickly or without some pain.

As a result, it remains a difficult time in the capital markets, especially for those who do not want to experience a repeat of 2008. A few general responses to those fears are in order. First, most investors’ portfolios have fully recovered from 2008/2009. This is not to say that past performance can in any way determine future results, or that these issues are the same ones we’ve faced in the past; it simply means that the markets can be resilient for those who have time on their side. And if someone has assets in the market, especially the global equity markets, those assets should have a 5 – 10-year time horizon at minimum.

For those who have shorter time horizons, a focus on liquidity and principal protection is probably in order. We may get a 1% return as we sit in well-protected investments and savings vehicles, like high-quality, short-term bonds, CDs and money market accounts with some regret as we watch the equity markets rise. Or we may sit in those same investments while the markets absorb the full implications of a Greek exit from the Euro and continued challenges both at home and abroad and feel a huge sense of relief.

The rub is that staying safe by sitting out of the equity markets over an extended period, inflation will erode the value of a savings account over time. Depreciating a portfolio at 2% annually over five years actually has a worse effect than losing 25% one year and gaining it back over the next four years. A slow and steady approach to accumulating high-quality investments that have the potential to appreciate over time tends to be the most effective way to achieve long-term portfolio growth.

Needless to say, it’s little comfort when one continues to hear the refrain, “you just need to think long-term” and “you need to ride it out” when the equity markets swing 10 – 20%, much less when they take a 40% dive. There are a few tactical hedges one can pursue, but they need to be tended to regularly. And unless we want to trade the markets 24/7, or buy “portfolio insurance” like annuities, we need to take a strategic view and make sure we are comfortable with the ways our portfolios are allocated among the various asset classes available.

This long-term, strategic approach is much less costly (and for most of us, just as successful) than chasing the markets and actively buying and selling various flavors of the same securities. Much like other times in history when we’ve seen broad, large-scale shifts in our political economy, these times will create both fear and opportunity. In some cases, we may be able to capitalize on these changes; in others, we will be left wondering what happened. But this is nature of an organic system with virtually infinite variables – change is the only constant. We need to accept that the challenges to our systems are structural in nature, the cumulation of years of action (or inaction) on a global scale. And as our economic, environmental, social and political problems get worked out, and as the value of our portfolios fluctuate accordingly, we need to work toward resolution of these problems while making sure our needs (both immediate and long-term) are addressed.

We also will want to pay attention to a number of compelling alternatives to the traditional stock and bond markets that are emerging before our eyes, such as community investment, real estate, and opportunities to participate in grass-roots funding of business ideas. In all cases, one must recognize that any investment, by definition, contains risk, and it is imperative to understand completely the risks one may face by pursuing some of these ideas. However, it is also important to realize that some of the problems we have created cannot be solved through the same systems under which they originated. In fact, there are tectonic shifts that will need to occur for some of our problems will be resolved at all. None of the realities we face changes the fact that a well-rounded and well-diversified approach continues to be the most sound and effective (and maybe healthy) way to cope with uncertainty in whatever form it may take.

All in all, it looks to be an exciting summer. Making plans both to enjoy all that summer has to offer, as well as making sure financial plans are in order, is the best advice I can provide for anyone wishing to address their financial health. To that end, I welcome referrals or introductions, in addition to inquiries about ways to best align your investments with your goals and values.

I look forward to any questions or comments you may have. Please note that I will be out of the office June 19th – June 27th. If you have immediate investment-related issues, please call the Schwab Alliance “hotline” at 800.515.2157. Otherwise, I will follow up with you upon my return.

All the best,


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