The European Union and its currency, the euro, have been splashed all over the news for months now. We’ve seen trouble in Greece, Ireland, Portugal, Spain, and Italy—and we may see other countries stumble. What does this have to do with your retirement investing strategy? There are many important ways the situation in Europe could affect U.S. monetary, fiscal, and political policies. Separately, but connected, there are also several ways Europe’s state of affairs could affect your retirement plan. Here are five considerations as you review your strategy.
1) Bond funds that contain large holdings from Greece, Spain, Portugal, Italy, or Ireland could be too risky to fill a traditional bond fund position. That’s because the bond fund asset class should, in most cases, fall on the low end of the risk spectrum in your retirement allocation. The uncertainty surrounding these countries adds a decent amount of risk. Additionally, we look to bond funds to have a low correlation to other asset classes, and the troubled countries make that correlation less predictable.
Examine the underlying investments in your bond funds to ensure they aren’t overly loaded with treasuries from troubled economies.
2) We’ll likely see more short-term volatility from domestic bonds, mainly because negative discussions about riskier bonds cause confusion about all bonds. Even solid bond funds face a short-term headline risk. It’s a matter of consumer confidence and overall market volatility, since short-term performance can be based largely on perception rather than value.
Since retirement investing is a long-term endeavor, don’t rush to dump good investments when the ride gets a little bumpy. Continue to monitor the situation, and stick with your long-term investing strategy.
3) U.S. government treasuries are still backed by the full faith and credit of the U.S. government, which has never defaulted. As turbulence rolls through Europe and elsewhere, the world buys U.S. treasuries. Further, the U.S. dollar is still the world’s reserve currency, so we have fallbacks even though our economy isn’t at its strongest. The short-term risk is volatility caused by headlines, which retirement investors can ride out.
The long-term effect could be that more consumers are driven into U.S. treasuries, potentially increasing their price. Retirement investors with U.S. treasury holdings could benefit from such an increase.
4) The dollar will likely see some volatility, again related to investor skittishness. Ultimately, though, we could see a flight to the security of the U.S. dollar, causing appreciation. If the value of the dollar increases, lower-risk cash-equivalent investments could benefit.
5) There will be greater risk associated with U.S. companies that have strong ties to floundering European economies, governments, and organizations. Investigate the underlying investments of stock funds you own to ensure you’re not exposed to undue risk through this association.
Since what you should focus on in your retirement plan is a long-term strategy, try not to stress about euro-zone problems. And you should continue with your contributions through any short-term shake-ups. Stopping your contributions when returns seem rocky and starting back when things seem calmer shouldn’t be your plan. After you’ve done your research and made appropriate adjustments that fit with your long-term strategy, have confidence in your plan. Don’t give into the barrage of talking heads droning on about Europe. Focus on the long-term, monitor in the short-term, and keep rebalancing regularly.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.