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Euro Zone Debt Crisis – Investment Outlook

Triage Investing Blog reader Mark writes,

Brad, I’m curious to hear your thoughts on how macro events (the mess in Europe) affect your investment outlook and behaviour? Mauldin’s recent article (Business Insider) prompted this for me. Thanks.

For those of you who first don’t know John Mauldin he publishes a weekly email, titled Thoughts From The Frontline, and is author of Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market.

John’s been writing a series of articles related to the Euro Zone Debt Crisis that investors have heard news and discussion on, but not really taken note of the potential impact it may or may not have on your portfolio.

…Europe’s leaders are committed to keeping both the euro and the eurozone as it is. But for it to do so, everything must change…This is no easy task, as no one wants a change that will impact them negatively; and there is no change that will allow things to stay the same that does not impact all severely…

John is extremely accurate in that above statement from his column, Staring Into The Abyss. The proof is actually not something that needs to be measured, but instead can be observed.

Humanity either embraces or fears change depending on how it suits our purpose.

The political leaders of Europe, and its citizens, are resisting a change that is both necessary and essential. It is the same issue that we will face in North America, and have been, over the past four years.

Financial debt is a very serious issue and one that in my opinion hasn’t taken the precedence it deserves. The amount of debt owed individually and collectively by many nations will significantly affect their economies. We can see this impact still on the US economy now four years after the credit crisis began.

In Canada we’re not immune either; we have record high debt levels for individuals, a frothy real estate market and extremely low interest rates that encourage more poor financial decisions.

I think the Europe problem, just as any of the other debt stories, is a serious macro event to pay attention to as an investor.

If you’re a diversified long-term investor you have the benefit of time to remain invested in companies, mutual funds or ETF’s with greater exposure to Europe. If you’re a diversified short-term investor (say near retirement) you have no business being invested in risky investments or in guessing where the market will move.

I’m generally a balanced investor keeping my exposure to any one company, sector or country appropriate. Now is the time, for a disciplined long-term investor, to remain mindful of diversification and to not overweight equity or fixed income exposure to one area or another in an attempt to adjust for risk. You may overweight in bonds and miss out on a rally in equities or overweight equities and get burned as losses mount.

For my portfolio, with a 20-30 year investing horizon, I take the same approach I always do. I don’t invest in things I perceive to have too much risk and I focus on capital preservation. I’m maintaining my exposure to Europe through broad market ETF’s and certain companies with European operations, but I am not taking positions in say individual European banks (are you CRAZY!?) because they’re perceived as undervalued.

There will be a time to invest in European stocks. It will be short, uncertain and likely very volatile. I don’t assume I can time the market to know the exact time so I still maintain some exposure and buy when my investing approach (portfolio allocation) says to.

What I’m not foolish enough to do is expose my capital to unnecessary risks in Europe when the leaders themselves can’t be proactive in dealing with the crisis.

Always be proactive versus reactive to any bad situation.

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