The Financial Implications of Greece

Greece is heading towards another deadline in their ongoing debt struggles. The country has been dealing with deficits and financial problems for years.

Should this situation concern you? A little or a lot?

The Greece financial situation has been a constant hot topic in the financial press and media. This will likely continue for a while.

The Greece government faces a June 30th deadline to make a huge debt payment or work out another agreement that essentially kicks the “can” (solution) further down the road.

This is an example of a problem that causes lots of headlines and short term financial market volatility, as financial markets do not like uncertainty. Markets in Europe and the U.S. will continue to react based on expectations and actual events, both good and bad.

However, you should remain focused on your long term financial goals and investment plan, not on the short term volatility that the Greece financial crisis may cause.

Greece is a very small country, in terms of population and the size of their economy. Greece is struggling with a serious problem which will have a significant impact on their population. This problem may have an impact on the Eurozone, but it’s impact on Europe may be bigger politically than the long term economic impact.

For example, the value of all the companies on the Greece stock market as of 12/31/14 was $34 billion. Germany’s stock market value was $1,383 billion, or more than 40 times larger than Greece. Greece’s economy is so small that it would only be .15% of the U.S. stock market value (far less than 1% of all U.S. public companies).

While the Greece crisis will get the headlines, we don’t think it will have a dramatic effect on what American consumers buy, homes to be bought and sold, and the business plans of most large corporations throughout the world.

There will always be financial challenges and crises which occur throughout the world. Some can be anticipated, such as this one, and some which cannot be predicted.

A key factor of your financial success, and your own peace of mind, is to accept that events like this will occur. They may cause short term volatility, but you should not “react” to these events by changing your financial strategy.

We cannot control these events. We cannot accurately predict the specific outcome of the Greece crisis. We cannot know how and when it will be resolved.

You should focus on what you can control, such as working towards your long term goals. If your focus is 5, 10 or 15 years in the future, then events like this should be considered short term distractions. Keep your focus on the long term, not the short term noise.

 

Having an Impact

Our firm has an impact on people’s lives. We can influence and affect the future of their life, their children and siblings, as well as the legacy they leave.

The more that we build relationships and trust with our clients, the deeper and broader this impact becomes.

A client gets referred or comes to us for investment planning. This is where it usually starts. Their first priority is to improve their investment portfolio, or to understand their investments. We evaluate the client’s financial situation and determine the appropriate amount of risk they should take. We almost always reduce their overall investment costs. We diversify their stock portfolio and improve the quality of their bonds.

And then, at some point, the topic changes from investing to….

  • They want to discuss how to make significant charitable contributions to organizations that are near to their hearts.
  • They want to know how to fund a child’s or grandchildren’s college education.
  • They want guidance regarding Social Security. How and when should we start to take Social Security? Should we start taking distributions at age 62, 66 or wait until age 70? This decision has a large impact on your financial future.
  • If a client is self-employed, as a consultant for example, they want guidance on how they can make huge annual retirement contributions, so they can save for retirement and reduce their taxes.

It is through these various discussions and meetings that real change and impact can occur.

  • Can you help me with my estate plan? The client knows that their estate plan needs to be reviewed or updated, but is not moving forward and resolving issues. We help through discussions and creative ideas. We assist by clarifying relevant issues and ensure that these are put into their Estate Plan documents.
  • How much life insurance do I need or is our life insurance appropriate? We help them to analyze these issues and reach decisions.
  • Can you review the portfolio that we still have with another broker? The client says they don’t understand what the other investment professional is saying or what they are doing. They tell us that our approach to investing and the discussions they have with us are “understandable.”

As the relationships develop, the conversations grow. And the impact deepens.

  • We advise a client that they can afford to pay off their grandchild’s student loans. This makes the grandmother and granddaughter happy. Both are less stressed when the debt burden is gone.
  • We tell someone it was OK to take that special trip after a loved one was very sick. It is not always about the money. It is about living the life they want, while both are alive. They now have peace of mind that this “luxury” was the right thing to do.

You may meet with us initially about your investments, but we can provide you value in so many more ways. It usually begins with a conversation and we are here to listen. It’s more than investing; we want to make a difference in your life.

 

News and the Markets

The financial markets do not always reflect what you read and hear about in the news media.

What do you think has performed better during 2015, US stock markets or International stock markets?

Europe is having difficulty. There are daily reports about the troubles Greece is having with its huge debt burden.

So Europe and other International markets must be underperforming the US stock markets, right? That would be logical.

When meeting with clients over the past weeks, most express surprise to find out that the opposite is true.

For 2015, International stock markets are outperforming broad US stock market indexes. Patterns like this can change quickly. This information is instructive concerning diversification and what to focus on: returns and your investment plan, not the news media.

Let’s review some 2015 broad stock market results through June 11, 2015. I’m not providing specific numbers below, as that is not the point. The trend or pattern is what is important.

US Large Company stocks                                                      Slightly positive

US Small Value stocks                                                             A little more positive

International Large Company stocks                                   Much better than above
More than 2X greater than US Large

International Large Value stocks                                          Even better than Intl. Large Company

Emerging Markets                                                                  A little worse than US Large Company

As financial advisors, this is why we focus on adhering to our investment philosophy of broad global diversification, and do not focus on media headlines. Our disciplined philosophy provides results and a clear path towards financial success. Following media headlines leads to confusion and indecision.

The same applies for interest rates. The major headlines over recent months is that the Federal Reserve has not yet increased interest rates and is not expected to act in the near future.

In our blog post dated May 22, 2015, Interest Rates: Our View and What You Should Do Now, we pointed out that the Federal Reserve controls short term interest rates, while long-term interest rates can move independently of the Fed.

So while the media has focused on the Fed not taking action, one would think interest rates have remained unchanged in recent months. That is true for short term interest rates, such as up to 3 years.

However, longer term interest rates have increased significantly, especially on a percentage basis. The 10 year US Treasury bill has increased as follows:

Early April:                    1.83%

Mid-May:                       2.20%

June 11:                         2.40%

This increase has caused mortgage rates to increase by 1/2% since April. The 10 year Treasury interest rate has increased by over 30% in a few months….while the headlines you read are that the Fed has not increased interest rates. Both are true, but very different.

Our objective is to provide our clients with information and advice they can understand, which helps you to reach your financial goals and enjoy a better life.

We hope this helps!