3 Lessons I Learned from the Greek Riots and Market Panic

by Darwin on May 8, 2010

The World is a Very Small Place

As the New York Times so eloquently envisioned in the Web of Debt infographic, as Greece goes, so does the rest of Europe due to the incestuous relationships of virtually every large bank.  And lest we don’t forget, much of Europe, and the rest of the world for that matter, is still paying the price for the US export of toxic mortgage instruments to their banks.  Likewise, US markets suffered yesterday as it became clear that we’re not entirely de-linked back from Europe either.  It’s a small world.  Who would have thought a year ago that riots in Greece could cause US investors to lose billions in a day?  But as Greece found little interest in their bonds, the speculators pounced.  It just puts into perspective that markets are complex, nobody has it all figured out and ALWAYS lurking around the corner is another crisis that could very well impact holdings in the US you may have thought were insulated.

Don’t Touch That Trading Account!

Much like many of my friends and family who panicked and sold off all stock investments at the bottom in March 2009, many investors saw the S&P500 down almost 10% in a single day and said, “Get me out of here before it gets worse!”.  Within minutes, markets returns to relative normalcy (back to the down ~3% on the day from earlier in the afternoon) and they in essence sold at the bottom – and they were probably buying back in on Friday at a higher price.  Personally, I made a volatility trade which had me up over 20% in minutes, but alas, I didn’t sell and it came back to earth within minutes.

Now, many trading experts recommend you put stop-limit orders in place which will automatically trigger stock sales in the event your shares drop to a certain level so you don’t lose more.  Well, as a result, investors lost Billions yesterday on what may have actually been an error.  As outlined in this CNBC article, since so many traders had order in to trigger if the market dropped say, 5%, even though it just dipped below for a few minutes, millions of trades were executed which probably shouldn’t have been – and then shares rose back to levels above those sales.
All this supports the notion that a) most retail investors probably shouldn’t be “traders” and b) while buy-and-hold failed over long periods in the past decade, at least during shorter periods of crisis and volatility, retail investors are probably best off making more thoughtful, strategic investments, rather than trying to react to daily events.

This Could be the US within Years

Let’s see…Greece is having trouble with unfunded liabilities, runaway debt and constituents that demand they live off the public largess while much of the world recognizes that the current situation as unsustainable.  I don’t see how the US is much different.  While there are rosy projections that we’ll eventually be decreasing our deficit over the next few years if all goes well, what’s clear even in the most optimistic government models is that in 2030 and beyond we have a runaway situation.  We’re seeing states and municipalities struggling to control debt and most of it stems from the overly generous pension and healthcare obligations they’ve made to generations of public-sector workers that is unsustainable.  While the private sector has cut jobs, real wages and forced increased employee contributions to benefits for a decade, public workers have pretty much maintained the status quo as if they live in a vacuum.  I can’t blame the workers for doing they best they can for their families, but politicians and fiscal oversight decision makers have some tough choices ahead of them.  Cut the lavish spending now or face default later due to the generational debt we’ve burdened future generations with.  When the time of reckoning comes for the US – we may very well see public workers, school teachers and city employees rioting in Washington.

As far-fetched as it sounds now, are we really that different from the Greeks?

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1 Budgeting in the Fun Stuff May 11, 2010 at 2:19 pm

The USA is different from Greece in the fact that we are perceived as much different than Greece. If the world ever loses faith in the economic power of the USA in a big way, we’ll be up the creek.

Hubby bought extra stock over the weekend (Conoco was lowish and hubby had been wanting some Intel anyway), so our portfolio looks pretty good right now. Stock trading scares me, which is why all our 401k and Roth IRA money is in target date mutual funds for the long haul. Our next Roth IRA and our current Scottrade portfolio will be/is ran by my husband since I’m a risk weenie.

H Reply:

We are all Greek. Our great country is is debt. It’s that simple.

By not learning what to do with your money, you place it at risk. Husbands are great, I am one, but I share these decisions about risk with my wife.

Read “The Four Pillars of Investing” by Dr. William Bernstein.

2 jim May 12, 2010 at 3:20 pm

The USA is significantly better off than Greece. Greek debt level (as % of GDP) is about double that of USA. Greek has defaulted on their debt FIVE times in their past. Overall tax burdens are higher in Greece. Their debts interest rates are about 6-7% higher than what US pays. There is little realistic comparison between the situation in Greece and the USA.

3 Aury (Thunderdrake) May 24, 2010 at 10:29 pm

Those huge tags in the stock market that have happened have been a very massive move indeed. which is what makes me so glad to be a dividend investor today. Instead of tracking the value of the shares themselves, I’m in it for the dividends. Instead of monitoring the price of each share, I monitor the dividend yield, dividend growth, and especially the number of shares that tie to it.

It’s been said that there’s more money to be made during a bear market than a bull. But corrections like these can really throw a lot of speculators and stoppers off their horses.

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