Stocks started the week lower today on the news that the euro-zone did not come with another plan to temporarily "fix" the Greece situation. This is surprising to me, and shows me how the market is trading on such short-term news right now.
The reality is that there is no solution to Greece other than a default and/or currency devaluation. You can't fix a situation with too much debt without austerity, and the people will likely not accept much more austerity. Is there really a path that doesn't lead to Greece bowing out of the Euro, going back to its own currency, and then devaluing that currency to "fix" its own problems?
If that is the case, does it make sense to buy any stocks right now until this fully shakes out? The markets get rattled each time the Greece and Euro situation flares up. Upon news of a temporary measure to kick the can further down the road, the markets are eased even though the markets know nothing has been really fixed.
If we are long-term investors (and I am), does this situation warrant holding off on committing new money into stocks until this shakes out? What if it takes a year or two or three to come to a head? I would suggest that it would indeed be worth it.
My focus is for the most part on dividend stocks. Since the companies I own are primarily defensive and somewhat recession resisitent, I'm not selling these positions. I will continue to reinvest dividends to a certain degree, but I'm going to hold a significant chunk of cash to utilize for future situations where volatility presents itself. I also have significant exposure to gold and precious metals which will hedge against uncertainty, a global debt crisis and rampant currency devaluations.
Skeptics on these ideas will shout that I'm trying to time the market. I disagree. I'm not warranting trading in and out of markets based on short term movements. I'm trying to recognize the realities of the macro economic environment and hedge myself against catastrophic market movements. I do this by holding some cash and gold. I don't suggest holding significant levels of cash and gold under all circumstances, but when I see a looming debt crisis and financial crisis that seems like there is no clean way out, I definitely recommend it.
Stick to quality companies that will continue to perform in a tough economic environment. People will need food - I hold the largest grocer in the country: Wal-Mart Stores, Inc. (NYSE:WMT). People will need energy - consider a high quality energy company. Dividends will also help provide a cushion against possible volatility.
A few questions to ask ourselves are as follows: How will our portfolio be impacted if significant economic events result in a large move lower in the markets? How will we react if that happens? Do we have a plan for such volatility?
Disclosure: I am long WMT.