Market Beat: Eurozone fears rattle stock market | SierraSun.com
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Market Beat: Eurozone fears rattle stock market

TAHOE/TRUCKEE andamp;#8212; Stock market investors face many different types of risk. One type of risk is referred to as contagion risk. Contagion risk is similar to systematic risk but is defined as a scenario where one financial event leads to another which eventually leads to a meltdown. The U.S. subprime crisis of 2008 at first appeared to be limited to the U.S. housing market, but eventually spread to lending liquidity, bank reserve requirements and went overseas to Europe and Asia. Stocks plunged and investors fled to safe investments like U.S. Treasuries. Contagion can be diversified to some extent by holding treasuries in your portfolio and by hedging.Currently fears of a Greek default and the worry that the much larger economies of Spain and Italy could follow suit triggered a sharp selloff in global markets last week. The risk from potential eurozone defaults is not limited to equity investors. U.S. money market funds own securities issued by Europeandamp;#8217;s largest banks. The problems facing Europe are complex. One issue is that they have a single currency, yet donandamp;#8217;t have a single central bank. Each country has its own central bank and the decision-making process can be quite slow.What action an individual investor should take at times like these depends on your own unique situation. Younger investors seeking long-term growth of capital may want to stay the course, and if using a dollar cost averaging approach to wealth building, use times like these as a buying opportunity.Investors at or near retirement may want to use strategies to protect capital, which could include moving funds out of the market into risk-adverse assets or employing a temporary hedging strategy until the situation stabilizes.With all of the flexibility that exchange-traded funds offer investors these days, it is possible to buy an ETF that goes up when the euro or European stocks decline. They are known as inverse ETFs, and they short the underlying index or currency. It is very important to understand how inverse ETFs work before purchasing one andamp;#8212; they are inverse the market on a daily basis only, and over time will have tracking error.andamp;#8212; Kenneth Roberts, a Truckee-based Registered Investment Advisor, has been in the securities business since 1992, has worked as a branch manager for a major Wall Street firm and is currently a portfolio manager for Fusion Asset Management. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-675-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.


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