Swedroe: Don't Derail Your Plan Over Greece

July 24, 2015

Investors certainly have enough to worry about these days. In addition to concerns about the Greek crisis itself, a lot of investors are worried about the risk of it spreading. Greece did indeed default on its International Monetary Fund (IMF) loan, but has since repaid it with the new rescue package it received.

Many of these investors began envisioning a repeat of what's come to be called the Asian Contagion, which started in Thailand in the summer of 1997 and then spread throughout Southeast Asia.

Its effects were felt around the world as stock markets from Russia to Europe and the United States suffered bear markets. This crisis led to the failure of what, at the time, was the largest hedge fun in the world, Long-Term Capital Management, which in turn threatened the entire financial system.

From a high of 1,190 on July 20, 1998, the S&P 500 plunged to a low of 923 on October 18, 1998, a drop of almost 23 percent in just three months. The NASDAQ fared much worse, falling from a high of 2,028 on July 21, 1998 to a low of 1,334 on October 8, 1998, a drop of more than 34 percent. No wonder investors are concerned.

And if the risk of contagion wasn't enough, during the most recent Greek crisis the markets had to contend with a sharp drop in the Chinese stock market and the likely default of Puerto Rico. Add to that the negotiations with Iran, along with the rest of the serious problems in the Middle East. Finally, markets were further concerned about expected action from the Federal Reserve to raise interest rates in the near future.

Stick With The Plan!
Given all these anxiety-causing events, what should investors do? Whenever I'm asked to comment about concerns such as the ones mentioned above, or about a particular forecast of doom and gloom by some market "guru," I address the issue in the following manner.

I begin by asking: Can you detail for me the list of issues causing you so much alarm that you are considering abandoning your well-thought-out plan, which is already built to anticipate that such events will occur in an unpredictable manner? If the issues are genuine—sometimes they arise from the words of "crackpots" who predict end-of-the-world scenarios—I will generally agree that they might be of legitimate concern.

However, I then proceed to ask: Are you the only one who knows these facts, and are you the only one concerned about them? The obvious answer is "no." Which leads to the next question: Do you think all the smart people at firms such as Goldman Sachs and Morgan Stanley, and all the hedge funds and institutional investors (who can do as much as 90 percent of the trading, and thus set market prices) are unaware of these issues/facts? Again, the obvious answer is "no."

Finally, I point out that, therefore, it must be true any views/estimates/forecasts of what is likely to happen are already embedded in prices, and thus it's too late to act. Unless you think you can forecast better than the market in all its collective wisdom, you should do nothing.

Forecasters Usually Fail
I also cite the research showing that there are no good market forecasters (and that certainly includes "gurus" who regularly appear in the financial media, such as Dr. Mark Faber, Nouriel Roubini and Peter Schiff) and recommend two of my favorite books on the subject of forecasting accuracy, "Expert Political Judgment" by Philip Tetlock and "The Fortune Sellers" by William Sherden.

Lastly, I ask: Who do you think is the smartest investor of our generation? The obvious answer, and the one I most frequently receive, is Warren Buffett. I then ask: Do you think that Buffett is selling based on the current situation or some "guru's" forecast?

Since Buffett says his favorite timeframe for holding a stock is forever, and his advice is to not time the market (but if you're going to do so, then buy when others are panicking) again the obvious answer is "no." Which leads to the question: Why do you think you should act? Are you smarter than Buffett?

I close by reminding investors that Buffett has stated that he continues to make more money when snoring than when he's awake. And then I hand them a copy of my book, "Think, Act, and Invest Like Warren Buffett," and advise them to go home and read it.

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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