Swedroe: Don't Derail Your Plan Over Greece

July 24, 2015

Another Approach

Another tactic I use when addressing investor concerns is to play a game I call "If You Had A Perfectly Clear Crystal Ball." Imagine you had Mr. Peabody's—yes, I know I'm dating myself—Wayback Machine and could go back to the beginning of the year.

You would know, then, that Greece actually would default on its IMF loan in July. Pretend that, with this knowledge, you decided to sell your equity holdings. We, of course, know today what did happen with Greece (there are, however, really no clear crystal balls), so let's look at how various developed country stock markets have done so far this year. Yes, the Greek market did fall, about 25 percent through July 21, 2015. But how did other developed markets fare?

The table below shows the returns of ETFs for each of the other developed markets, from the best to the worst performance. Returns are in U.S. dollars.

Country Symbol YTD Return (%)*
iShares MSCI Denmark Capped (EDEN | B-89) EDEN 22.4
iShares MSCI Ireland Capped (EIRL | D-84) EIRL 18.0
iShares MSCI Italy Capped (EWI | C-92) EWI 16.1
iShares MSCI Japan (EWJ | B-99) EWJ 15.7
iShares MSCI Belgium Capped (EWK | B-79) EWK 14.6
iShares MSCI Netherlands (EWN | B-99) EWN 12.5
Global X FTSE Portugal 20 (PGAL | D-86) PGAL 12.5
iShares MSCI Hong Kong (EWH | B-99) EWH 11.1
iShares MSCI France (EWQ | B-97) EWQ 10.5
iShares MSCI Switzerland Capped (EWL | B-96) EWL 10.4
iShares MSCI Austria Capped (EWO | B-92) EWO 9.6
iShares MSCI Germany (EWG | A-97) EWG 7.2
iShares MSCI Sweden (EWD | B-95) EWD 7.2
iShares MSCI United Kingdom (EWU | B-88) EWU 5.4
SPDR S&P 500 (SPY | A-99) SPY 4.0
iShares MSCI Spain Capped (EWP | A-95) EWP 2.5
iShares MSCI Norway Capped (ENOR | C-96) ENOR 1.5
iShares MSCI Australia (EWA | B-97) EWA -1.9
iShares MSCI Singapore (EWS | C-97) EWS -2.1
iShares MSCI Canada (EWC | A-93) EWC -11.0

* Through July 21, 2015


Because many investors are worried about contagion, the first place we'll look is to the markets that are considered the next weakest links. In other words, to the dominos most likely to fall if there was in fact contagion: Portugal, Ireland, Italy and Spain. Together, Portugal, Ireland, Italy, Greece and Spain make up what are known as the PIIGS countries.

Portugal, the weakest of the other PIIGS countries, saw its market, as measured by the Portuguese ETF (PGAL), return 12.5 percent. The Spanish ETF (EWP) returned 2.5 percent. The Irish ETF (EIRL) returned 18.0 percent. And finally, the Italian ETF (EWI) was up 16.1 percent.

That's an average return for the four country ETFs of 12.3 percent. Not bad for a period just short of seven months. I doubt that there was a single forecaster that would have predicted such returns given the certain knowledge that Greece would default.

U.S. investors who went to the safety of cash would have been earning zero and been outperformed by all developed markets except for Greece, Australia, Singapore and Canada. Investors that instead fled to Vanguard's Short-Term Government Bond ETF (VGSH) would have earned just 0.6 percent, underperforming all but those same four markets as well.

Also of interest is that the U.S. market, generally viewed as a safe haven, was outperformed by 14 of the other 19 developed markets. And I would note that it's likely the negative returns of the Australian and Canadian markets were not related to Greece's default. The more probable explanation is that they were caused by the drop in oil and other commodity prices (as both countries are large exporters of commodities).

The lesson I hope you'll take from the above data is that even with a clear crystal ball, it's very difficult to outperform and best not to try.

On a final note, I recently heard Buffett state that he hadn't read a market or macroeconomic forecast in about 25 years. You shouldn't either, especially if you are prone to act on the forecasts and the recommendations they make. The evidence clearly demonstrates that's what Charles Ellis called the loser's game.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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