Posts Tagged ‘investors’

Why the Crisis in Greece Matters to You -  By  Jeffrey D. Carlson, CFP®

The deteriorating economic situation in Greece is largely responsible for the recent selloff in global markets. Markets worldwide are paying close attention to economic conditions in Europe, and Wall Street is reacting to the televised images of riots and protests as Greece attempts to stabilize its situation.

So it’s no surprise that skittish markets plunged upon the latest developments in Europe. World markets have been concerned about the state of some unstable European economies – namely Greece, Spain, Portugal, Italy, and Ireland – whose national debts continue to hamper their full participation in the global recovery. Here is a summary of the situation and a few things to watch as it unfolds in the coming days and weeks.

Why is Greece in crisis?

After years of deficit spending and continued borrowing with no significant success in raising revenues, the Greek economy was in a precarious position when the economic downturn hit during 2008-2009. Its national debt now outpaces its gross domestic product (GDP) by more than 12 percent.

Greece’s debt recently downgraded to junk status, which indicates that foreign investors have little confidence in the strength of the Greek economy. Pension funds and other investors are unable—except at prohibitively expensive distressed interest rates—to buy the country’s bonds, eliminating a key source of funding for Greece. The prime minister is attempting to address the crisis by implementing tax increases and steep, unpopular spending cuts – leading to civil unrest and riots.

Many citizens took to the streets to protest increased consumer taxes, cuts to pension funds and wage freezes on civil servants. Greece also proposed eliminating some public sector positions, and has asked public employees in the military, police, hospitals and schools not to retire, as it would place additional demand on public pension resources.

What is being done to improve the situation?

European Union (EU) leaders worked with the International Monetary Fund to structure a solution and act quickly. The EU announced a bailout package on May 9 measuring nearly $1 trillion total in an effort to stabilize the situation and bolster confidence among investors. This speedy, unified, and bold reaction came after the European nations had taken earlier criticism for being tentative when early signs of the crisis appeared.

In addition, the central banks of Canada, Britain, and Switzerland, together with the U.S. Federal Reserve and the European Central Bank, moved to establish swap lines that are expected to provide more liquidity to the European banks and money markets. These moves indicate that the crisis is being monitored – in Europe as well as in North America – to keep the situation from spreading to other debt-ridden economies.

What does it mean to consumers?

The crisis has hit euro-dominated companies hard, so investments in firms or pensions with significant exposure to these companies have suffered. On a broader perspective, this episode has hurt the credibility of the euro, and its value compared to the U.S. dollar has fallen. In the near term, American travelers will see their dollars go further when they travel to Europe. Conversely, European traveler to the U.S. will realize less buying power out of their euros.

What is the outlook for Greece and the EU?

Markets will be watching the developments in Europe closely in the near future to see if fears of the debt crisis in Greece could spread to other debt-saddled countries. Greek debt to European banks totals around $200 billion; if the crisis extends to Spain and its $800 billion bank exposure, the situation will be seen as more serious.

What about the U.S. deficit?

This crisis has spawned a new sense of urgency in discussing the growing deficits in other countries, including the U.S. (whose deficit reached $1.4 trillion in 2009). However, the U.S. economy is diverse and robust, towering over that of Greece, which is small and getting smaller. Although the U.S. economy is now growing again, markets are paying closer attention to the U.S. federal deficit. The crisis in Greece has leaders around the world taking notice, and its tale of unchecked deficit spending should serve as a warning for us all. Nations that take significant steps to rein in deficits will provide a more solid footing for their economies and in the process will show investors that the recovery we have seen since the market lows in March 2009 can continue, even with periodic corrections.

Jeffrey D. Carlson is a CERTIFIED FINANCIAL PLANNER practitioner™ who can be reached at (410) 740-8000, 10025 Governor Warfield Parkway, Suite 209, Columbia, MD 21044. Or visit www.ameripriseadvisors.com/jeffrey.d.carlson.

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Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

The views expressed here reflect the views of Ameriprise Financial as of the date given. These views may change as market or other conditions change. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

© 2010 Ameriprise Financial, Inc. All rights reserved.

Redefining risk in a down market

By

Jeffrey D. Carlson, CFP®

Has Wall Street hit rock bottom, and is the U.S. economy bound for recovery? Some claim the worst is over, which is of small comfort to many investors. Just as the stock market crash and Great Depression of 1929 had a lasting impact on those who lived through it, our current recession could change the way Americans earn, save, invest and spend money. The question is how will we improve our individual and shared financial future?

We all make choices. The tanking economy has triggered all kinds of responses. Some investors have simply pulled the plug on their remaining investments however; a mass exodus from the stock market will do more damage to the economy as a whole. The other problem with this approach is that once you sell a stock, you forfeit any opportunity to regain the value you lost. Some investors are paralyzed by fear and have not corrected or adjusted their financial position in the marketplace. While this is a common and natural response, it’s not necessarily in your best interest to stand still. Whether you ultimately move or adjust your stocks, it’s important to take time to evaluate your investment positions and make changes as you see fit, all the while proceeding with due caution.

Rebalance your holdings and diversify. The widespread nature of the downturn means almost every sector of the economy has been negatively affected. Those portfolios that were weighted heavily in risky investments generally suffered the largest losses. Many investors re-evaluated their risk tolerance. Low-yielding CDs, money market funds and Treasury Bills grew in popularity since they were considered less risky investments. Unfortunately, these options don’t provide much return. In fact, your assets may remain rather stagnant in these investment vehicles, but some argue that could be better than watching your savings drop in value.

Buy low if you can bear the risk. This suggestion may seem counterintuitive, but if you are in a position to accept risk, right now is a great time to invest. The market is full of bargains and there will be people who can profit from the market’s downfall. As the old adage goes, buy low and sell high. But as recent history shows, investing involves risks — more than many of us bargained for — and there are no guarantees.

Recoup some of your losses through tax breaks. With the failure of mortgage companies, banks, development firms, car manufacturers and other businesses, some investors have experienced losses that simply can’t be replaced. If you find yourself at ground zero (or below), keep in mind that you may be able to offset your losses in the form of tax breaks. Talk to your tax advisor to determine if you can deduct a portion of your losses from your taxable income.

Consult with a financial advisor. Now more than ever, investors can benefit from the insights of an experienced financial advisor who can help you sort through your options. As survivors of the recession, we can potentially work even harder, adjust our expectations and appreciate what we have. Much of the success or failure of the stock market relies on something intangible — buyer confidence. If we can find our way back to confident investing, we could be on our way to a stronger economy.

Jeffrey D. Carlson is a CERTIFIED FINANCIAL PLANNER practitioner™ who can be reached at (410) 740-8000, 10025 Governor Warfield Parkway, Suite 209, Columbia, MD 21044. Or visit www.ameripriseadvisors.com/jeffrey.d.carlson.

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

Diversification helps you spread risk throughout your portfolio, so that investments that do poorly may be balanced by others that do relatively better. Diversification is not a guarantee of overall portfolio profit or protection against loss.

Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.

© 2010 Ameriprise Financial, Inc. All rights reserved.