Why the Unrest in Egypt Doesn't Matter for Your Portfolio

Last Updated Feb 1, 2011 5:10 PM EST

Whenever crises pop up -- no matter if they're financial messes, political unrest or natural disasters -- I inevitably get plenty of questions about what they mean for the markets. My answer has always and probably will always be the same: We've been through this before, and we've come out fine every time. Sometimes the markets fall sharply for an extended period because of a crisis, and other times they take a short hit and bounce right back. While we do know that there will be crises, we don't know when they will occur, how long they will last or how deep they will be.

The political unrest in Egypt has many people seeking answers regarding what this means for their portfolios. Here are some of the headlines I've seen:

In other words, we go through this every time. Think back to just a year ago, when the fear regarding Greece defaulting led to panic about its effect on the markets. (The same could be said about the rest of the PIGS -- Portugal, Italy and Spain.) Or perhaps the ongoing political issues in Iraq, Iran, Afghanistan and North Korea. Or the financial issues regarding the flash crash, the potential domestic municipal bond crisis and still-deflated housing prices.

The point isn't that these crises are unimportant. These events are entirely outside of our control, so there's no point in worrying about them as far as our investments are concerned. What you should do instead is focus on what you can control:

  • The amount of risk you're taking
  • The costs of your investments
  • The tax efficiency of your portfolio
The fact that these crises occur is why we've enjoyed such a high risk premium for investing in stocks. If you start feeling uneasy about market fluctuations, one of two things needs to occur:
  • Remember your plan and why you chose your allocations.
  • Adjust your plan to more appropriately consider your ability, willingness and need to take risk.
What we do know is that the markets have either already accounted for the possibility or will absorb the news very quickly. We also know that there's no guarantee the markets will fully recover from major events. That's the nature of risk. If that risk wasn't present, then stocks wouldn't be viewed as risky investments. Accordingly, your plan should take this into account as well.

If you're still worried about what this will mean, ask yourself what great investors such as Warren Buffett would do, and remember Buffett's classic line about investors: "They should try to be fearful when others are greedy, and greedy when others are fearful."

More on MoneyWatch:
Should Current Events Affect Your Asset Allocation?
Lessons Learned from the Greek Tragedy
The State of the Municipal Bond Market
Is Inflation Risk Overstated?
The Death of Buy and Hold

Hear Larry Swedroe discuss current investment trends and topics every Sunday at noon on 550 AM KTRS in St. Louis or streaming via the KTRS Web site. Can't catch the show? Download the podcast via www.investmentadvisornow.com or through the Buckingham Asset Management podcast page on iTunes.

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.