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What the European Debt Crisis Means for You


Although it's too late to invest in an asset class that might benefit from the breakup, there's still plenty you can do to cash in on the eventual crash.

Things are bad in Europe. Anybody with access to a newspaper or the Internet has heard about the debt crisis in the eurozone, which consists of 17 European Union member states, including Germany and France, but not including the United Kingdom and Switzerland.

Things are bad. Greece totters on the edge of bankruptcy, with Italy, Spain, and Portugal lined up behind, ready to follow suit. Meanwhile, Germany and France, the two financially strongest members of the eurozone, struggle to resolve the problem, even as they wonder, "What were we thinking?!"

Downhill From Here?

The more important questions for our purposes are, how can you benefit from the crisis, or in the alternative, how can you avoid being hurt by it? According to Komal Sri-Kumar, chief global strategist for Los Angeles-based Trust Company of the West, it's better to address those questions now than later. "Investors should be concerned because the European debt crisis is going to be a significant force for a second downward turn in the US economy during calendar year 2012." Worse, he claims, US equities are currently overvalued, and "a second downturn is not figured in their prices."

If that doesn't get your attention, maybe this will: Sri-Kumar says there's nothing good in this crisis for the individual investor, the common man or woman on the street (aka: you and me). "I'm saying that at this point, the everyday investor should stay away from European debt and equity. Further downside is coming."

David Taggart of (and my son) agrees. "All risk assets - everything but US Treasuries, the US dollar, and to a lesser extent, gold - could crater if the eurozone breaks apart," he says.

Enjoy the Ride

Okay, you're thinking, I'll just invest in an asset class that might benefit if that happens. "Too late," Taggart says. "Most of the really big moves have already happened for the most part, so you're kind of late to the party."

So, what is an investor to do? Here's a handy list of possible investment strategies:
  • Wait until the proverbial blood is running in the streets of Europe (no, not literally). "When that happens," Sri-Kumar says, "I'm going to say you should take a bucket and load it up with European debt and equity because the downside has happened."
  • In the meantime, don't be afraid to put your money into a mutual fund that invests in Europe. "It's not like there is not a single European company or bond worthy of purchase," Sri-Kumar continues. "Assuming you select your professional money manager carefully, then it's fine by me to let them put some of your money in Europe." To that end, Taggart says tread carefully and choose wisely. "Focus on the same things you should always be looking for in a money manager: a solid risk-management framework, a solid record in both up and down markets (good risk-adjusted returns), low fees, etc."
  • "US Treasuries and even high-grade mortgage-backed securities are also a safe bet," according to Sri-Kumar. "I think the Fed is going to do QE3 during the first half of this year, which will cause interest rates to go down, which in turn, will result in a rally in mortgage-backed securities."
  • He also likes Gilts, the UK version of Treasuries. "People are going to seek protection from outside the eurozone, and the UK is outside," he says. "My point is that when the house is burning down, you don't want to be sitting inside; you want to be across the street looking at it."
  • "Long-dated put options on the EUR/USD are also attractively priced right now," Taggart says. "If you buy them a year out, you will have hedged out a lot of the risk that comes with the current mess. But don't load the boat - no more than 1% of your portfolio," he adds.
  • Utilities, health care, and high-dividend US equities also look good, Sri-Kumar says. "If you want to be defensive, those areas will provide you some shelter."
Do the Chevy Chase

Hey, maybe the safest thing you can do with your money is use it now. Take that European vacation you've always wanted to take, especially if you have friends there. "They won't be coming here," Taggart says. "For them, things in the US cost 7% more now on average than they did last year. On the other hand, if you're travelling to Europe, things are cheaper." What crisis?

Editor's Note: This article by Gregory Taggert was originally published on MintLife.

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