Will Greece default, or won’t she? This seems to be the question on every investor’s lips, and the uncertainty surrounding the outcome has the markets on edge.
I have no inside information about how this crisis will be resolved, and even if I had the phones of every European leader bugged I’m not sure the information gleaned would be particularly useful right now. The EU leaders tasked with resolving this crisis seem to have no more of a grasp on the situation than those of us on the outside.
No one said that investing is easy or that it should be easy. Investing is an exercise in making difficult decisions under conditions of uncertainty. If we knew the future ahead of time, there would be no risk and thus no possibility for return.
The questions investors should be asking is not “What will Greece do?” but rather “How will my portfolio perform regardless of what happens in Greece?” and “Am I being properly compensated for the risk I’m taking?”
We’ll answer that question shortly, but readers should first understand a very important point:
read more There are two—and only two—risks that we as investors face every day:
- The risk of being in an investment that falls in value
- The risk of being out of an investment that rises in value
We tend to focus on the first type of risk, and it appears that we are hardwired to do so. In their landmark 1979 study, psychologists Daniel Kahneman and Amos Tversky found that people dislike losses 2.5 times more than they like comparable gains, and that most will actually engage in risk-seeking behavior in order to avoid realizing a loss.
Yet the second type of risk—opportunity cost—can be equally damaging to your long-term financial health. If you pile into “safe havens” like cash or Treasuries that yield next to nothing, your standard of living is almost guaranteed to fall over time.
A good investment strategy should balance these two risks, offering decent upside potential while keeping risk to a tolerable minimum. Given the pricing in today’s market, this is actually easier to do today than at any time in recent memory. As I wrote in the last post, at current prices I like “boring” blue chips that you know will survive anything like the “Wintel” duo of Microsoft (MSFT) and Intel (INTC)—see “The Ugly Sister.” I also like consumer products maker Procter & Gamble (PG) and healthcare giants like Johnson & Johnson (JNJ). If we have another 2008-caliber meltdown, these companies will survive it intact and will continue to pay solid (and likely growing) dividends throughout. And if we avoid a meltdown, they should at least match the broader market’s upside. Companies like these would seem to give you the best risk / return tradeoff given the unknowns we face.
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