While nobody knows what the future holds, one powerful person came pretty close to accurately predicting the problems Europe is having with the euro – a full 17 years before the current crisis began in 2010.
Former British Prime Minister Margaret Thatcher strongly
resisted having Britain join the single currency and, instead, pushed the
country to keep the pound sterling. Her view prevailed.
Today, the controversial Lady Thatcher is retired from
public view, but her take on the common currency of Europe has proved uncannily
accurate.
Paraphrasing her 1993 autobiography, a November 18, 2010
article in the Daily Telegraph said
Thatcher argued, “The single currency could not accommodate both industrial
powerhouses such as Germany and smaller countries such as Greece. Germany,
forecast Thatcher, would be phobic about inflation, while the euro would prove
fatal to the poorer countries because it would ‘devastate their inefficient
economies.’”
True to Thatcher’s prediction, the euro zone is suffering
from the imbalances caused by a currency shared by countries with dramatically
different economic, political, and cultural norms.
We monitor the euro zone problems because, in our global
society, a breakdown in Europe could spread to the rest of the world. And, once
again, euro zone leaders are meeting this week to try and solve their
structural problems. But, consider this. In the U.S. we have one country and
two major parties. In Europe, 17 countries share the euro and each of those
countries have multiple major parties. Knowing how hard it is for Democrats and
Republicans to agree, imagine how hard it is to get 17 countries and their
respective parties to agree on anything!
Given this difficulty, it’s not surprising that the euro
crisis has dragged on and on and on. Eventually, though, Europe will have to
make some tough decisions – or the market may do it for them.
VOLATILE MARKETS HAVE
EXPOSED ONE FLAW in the traditional thinking about
how to determine an investor’s “risk tolerance.” Traditionally, risk tolerance
was thought of in terms of a spectrum moving from very conservative at one end
to very aggressive at the other. And, risk was defined as how much of a loss an
investor could stomach. That makes sense, but it’s only one part of the risk
tolerance story.
Investors essentially have two types of risk tolerance:
(1)
Financial risk tolerance – which is
an investor’s financial ability to
withstand a decline in their portfolio.
(2)
Emotional risk tolerance – which is
an investor’s emotional ability to
withstand a decline in their portfolio.
Source: The Charles Schwab Corporation
Now, here’s the key – there
could be a very large gap between these two levels. For example, some
investors may be able to financially
withstand a 30 percent decline in their portfolio without it negatively
impacting their ability to meet their long-term goals and objectives. However,
some of those same investors may be able to withstand only a 20 percent decline
in their portfolio from an emotional
standpoint.
The emotional risk tolerance level is effectively your
“sleep” level. It’s the level where if your portfolio went down any further, it
would affect your ability to sleep soundly at night.
But, there’s more…
We also have one other factor to consider here and that’s
your time horizon. If you are 10 years away from needing to tap your investment
portfolio, then a decline in your portfolio today should not be a cause for
alarm. Why? Because you have 10 years to recoup the decline. Remember, today’s
stock market prices are only relevant to those who are selling today.
As your advisor, it’s important for us to know your
financial risk tolerance level and
your emotional risk tolerance level. With this knowledge, we do our best to
manage your portfolio in such a way that we won’t breech either of those
levels. After all, we appreciate a good night’s sleep, too!
Weekly Focus – How to Sleep Better…
Are you one of the lucky 42 percent of Americans who
consider themselves “great sleepers?” If not, try these tips from the National
Sleep Foundation:
·
Set and stick to a sleep schedule by
going to bed and waking up at the same times each day.
·
Exercise regularly, but do it in the
morning or afternoon.
·
Establish a relaxing bedtime routine
such as reading a book or listening to soothing music.
·
When you go to sleep, make sure your
room is dark, quiet, and cool.
·
Avoid caffeinated beverages,
chocolate, tobacco, or large meals right before bedtime.
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