Size is everything
As a proportion of global share markets, Greece is also a minnow. As of early July 2015, it represented about 0.32% of the MSCI Emerging Markets index and just 0.03% of the MSCI All Country World Index.
And while its total debt is large in nominal terms and relative to its GDP at about 180%, this still represents only about a quarter of 1% of world debt markets.
Of course, what worries investors is not so much Greece itself but the wider ramifications of the debt crisis for its European bank lenders, for the future of the single European currency and for the global financial system.
Yet, many of these concerns are already reflected in market prices, such as in Greek government bonds, the spreads of peripheral Euro Zone bonds, regional equity markets and the single European currency itself.
While no-one knows what will happen next, we can look at measures of market volatility as a rough guide to collective expectations. A commonly cited measure is the Chicago Board Options Exchange’s volatility index, sometimes known as the ‘fear’ index. This has recently spiked to around 18 from 12 in mid-June. But keep in mind the index was up around 80 during the peak of the financial crisis in 2008.
Of course, the human misery and dislocation suffered by the Greek people through this crisis should not be downplayed, neither should the financial risks. But from an investment perspective, there is still little individual investors can do beyond the usual prescription.
That prescription is to remain disciplined and broadly diversified across countries and asset classes and to be mindful that markets accommodate new information instantaneously. So the risk in changing one’s portfolio in response to fast-breaking news is that you end up acting on events that are already built into security prices.
In summary, the events in Greece are clearly worrisome, but Greece is a very small economy and a tiny proportion of the global markets. Events are moving quickly and prices are adjusting as news breaks and investor expectations adjust.
For the individual investor, the best approach remains diversifying across many countries and asset classes, remaining focused on your own goals and, most of all, listening to your chosen advisor, who understands your situation best.
Vice President, Dimensional
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