By FPA member Philip Herzberg, CFP®, MSF
Last Updated: May 10, 2010
Over the last few months, a widespread fear of a sovereign debt crisis has developed in Euro zone countries, with the most noteworthy concerns centering on the rising costs of financing government debt in Greece. As you hear discussions about further possible global contagion, you may wonder how these rapidly expanding developments can affect your financial plan, including your savings and investments.
First, let's offer some perspective on why you should pay attention to current happenings in Greece. Financial institutions in Germany, Italy, Spain, Portugal, and elsewhere in Europe hold a significant amount of Greek debt, which has led to a crisis of confidence as well as the widening of bond yield spreads and risk insurance on credit default swaps between the countries and other Euro zone members. In short, worries about countries with rising government deficits and debt levels across the globe, combined with a downgrading of European government debt, have generated the recent pandemonium on financial markets.
Through early 2010, as an overall net result from plummeting Greek government bond prices and skyrocketing bond yields, European and national governments have accumulated debt to fund economic bailout programs. That's in stark contrast to what has happened with the U.S. economic recovery, highlighted by interest rates reaching a nadir and prominent American companies improving their finances and corporate cash flows. Even though recent improvements in the U.S. economy, such as March 2010 consumer spending increasing 0.6 percent, have helped boost the dollar versus the euro over the past year, there is still cause for caution that this debt crisis could spread to the U.S.
In light of this current economic climate, you can adjust your financial plan, specifically your investments and savings, to do the following:
- Invest in cash and short-term fixed income investments if you have a shorter investing time horizon: With less than 10 years until retirement, you may desire to reduce your interest rate exposure over a longer period of time by shifting money into cash and other liquid investments [savings, six month Certificate of Deposits (CDs)].
- Stay aware of changing economic and market circumstances to make informed investment and portfolio decisions: Evolving economic and market conditions should substantiate a proactive and tactical approach to investment choices aligned with investor-specific information, including goals, risk tolerance and time horizon. You should be cognizant of fluctuations in interest rates and economic indicators, such as unemployment and Consumer Price Index (CPI), and their potential effects on your investments and savings.
- Ensure you have sufficient emergency fund assets: In the unfortunate event of a job loss, fortify your emergency cash reserves to allow for three to six months of fixed and variable expenses in liquid accounts. You should take care of short-term needs in an uncertain environment before addressing long-term objectives.
Justifiably, it's difficult to hear about the European sovereign debt crisis and not be curious about how these current developments affect your financial planning.
FPA Member Philip Herzberg, CFP®, MSF, is Director of Media Relations & Public Awareness for FPA of Miami-Dade.