Middle East in Turmoil - What Should Investors Do?

Source:Guardian.co.uk

"The country has gone to ruin,” Mona Abdelaziz, 30, who said that she holds a journalism degree and works selling tissues by the roadside, said in an interview yesterday at a protest in central Cairo. “Everything is expensive. How will my son marry, get an education, set up a household? There are no jobs, only for a select few. We have no hope.” 

Perhaps the smartest man I ever knew once told me there is only one economic principle - "people want to earn a good wage."   This plays out over time on a global basis. Most people are content to have the opportunity to raise their family in a setting where they are treated with respect. This, of course, bumps up against the small percentage of those who are power hungry and somehow feel they are entitled to live above the laws and economic circumstances that govern most of the world.

Egypt,, of course is a special problem for the U.S. because, once again, the U.S. finds itself on the wrong side. It says one thing and does another. And the world understands this. We continue to prostitute ourselves for oil.

What about investments? How is this going to turn out? How to respond to the quantum jump in uncertainty? Is this a Taleb  Black Swan? Is this Thanksgiving day for Taleb's turkey?

The answer is nobody knows. The violence could spread, thereby putting further pressure on oil prices and markets. At this point, this seems the likely course. Market observers remember well the East Asian contagion of 1997.

Or, Mubarak could step aside and someone of intelligence gain control and markets rally. Not likely, but possible.

As a DIY investor, you have an advantage over most investors. You have a thought-out asset allocation plan. You understand that markets are choppy and that the consistent rise over the past several weeks is temporary. You know your exact asset allocation. You understand you are in one of two boats - you are either in the accumulation phase or the decumulation phase. You are either building up your nest egg or you are drawing a paycheck off of it.


You've anchored your asset allocation  to your age. If you are 65 years old, you started at 65% bonds and added bonds, if you are risk averse, or reduced the percentage in bonds, if you are a risk taker. You understand that, if the events in the Middle East are keeping you up all night, you need to increase your exposure in fixed income. You saw the value of bonds on Friday in protecting portfolio assets. AGG, the Barclay's aggregate bond index exchange traded fund (ETF), rose .15% as the S&P 500 fell 1.79%. CSJ, a shorter maturity corporate bond ETF, rose .01%.

For the retiree, this is a point where the percentage in bonds could be increased by 5% to add a bit more protection in case this market continues South. Even with Friday's large drop, the S&P 500 is up for the year.

But what about the accumulator? You see the present situation a bit differently. You are alert to a possible opportunity to pick up equities at lower prices. You are poised to take advantage of  "dollar cost averaging" - the buying of more shares with a given amount of money at lower share prices. You are monitoring the market developments with an eye towards possibly increasing the allocation to your 401k, especially if you are more than 5 years away from retirement. Like the retiree, though, you are constantly taking your pulse. If it is racing, hold off on increasing exposure and maybe even reduce equity exposure a small amount.

The fact of the matter is that no one knows where we go from here. The global economy was in an uptrend before the riots in Tunisia started. Investors were slowly gaining confidence after the debacle in 2008. Now confidence has again been shaken. We know that the Great Recession weighs heavily on investors' minds. The important point to remember is that drastic portfolio shifts in these types of situations are typically harmful. Taking a small step to reduce volatility at the beginning of a potential downturn can be a useful calming step.

Disclosure:  This post is for educational purposes only. Individuals should do their own research and consult their advisors before making investment decisions.