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Greece: The Questions Investors Should Be Asking

Stop thinking about what Greece will do -- start thinking about how your portfolio will do regardless of the outcome


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 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 — or loss.

The questions investors should be asking are 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:

There are two — and only two — risks that we as investors face every day:

  1. The risk of being in an investment that falls in value.
  2. 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 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 most actually will engage in risk-seeking behavior 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 actually is easier to do today than at any time in recent memory. Here are my recommendation for the months ahead:

  • Avoid or underweight traditional “crisis hedges” like gold and Treasuries. This might sound counterintuitive given the possibility of a euro meltdown, but hear me out. Treasuries already yield so little, they appear to be pricing in the worst. At this point, even if the world ends, bond prices can’t go too terribly higher than they are now. And gold appears to be in the late stages of a bubble. While there might be modest downside protection here, there is virtually no upside, particularly in the case of bonds.
  • Avoid highly speculative sectors, mining and materials stocks, commodities and banks. Should the current state of fear subside without major incident, these sectors likely will enjoy a monster rally. But if we do have a crisis, they will get utterly slaughtered. You have decent upside potential but horrendous downside risk.
  • Try overweight “boring” blue chips that you know will survive anything. Lately, I’ve been attracted to the old “Wintel” duo of Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) — see “The Ugly Sister.” I also like consumer products maker Procter & Gamble (NYSE:PG), Kimberly Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL), as well as health care giants like Johnson & Johnson (NYSE: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. This is exactly what I like to see: good upside potential with only modest downside risk.

Greece might default tomorrow, or against all odds the European Union might manage to salvage their wayward member. But at current market prices, a portfolio of boring, dividend-paying blue chips would appear to be well positioned for either eventuality.

Charles Lewis Sizemore, CFA is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new Special Report: 3 Safe Emerging Market Stocks for a Shaky Market.”

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