Why ignoring Europe can be a profitable strategy


The larger eurozone crisis seems to be worsening by the day. At the moment, it’s hard to see a positive outcome to the troubles facing Europe, and that will continue to act as a brake on global economic growth. Equity markets across the world will ultimately reflect that pessimism over the next several months at least.

Now what
Earlier in my career, I pursued a Ph.D. in European history, and I previously worked as a researcher on European fund management issues. I’m also an Irish citizen who lived in London for six years. Despite my background, I have absolutely no idea how this crisis will play out in the end. Martin Wolf of the Financial Times — who is one of the finest commentators on European economic affairs — feels equally uncertain about what will happen next. He wrote recently:

How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile.

With all of this uncertainty around a crisis that could eventually lead to a depression in Europe and another severe recession around the globe, here are three possible ways investors might protect themselves from the worst-case scenario in Europe:

  1. Have a long-term time horizon: Fool co-founder Tom Gardner made the point recently that “long-term thinking is our greatest competitive advantage.” And he’s been telling investors to hold stocks for at least five years and beyond. In my opinion, markets are likely to be extremely volatile in the coming months, so having a long-term strategy will be critical to riding out a near-term market downturn. Now more than ever, investors should commit to a long-term holding period.
  2. Look for dividends: There are terrific opportunities for investors looking for stable Australian businesses that deliver large yields. Telstra (ASX: TLS) is one company we’ve highlighted in our special free report on dividend stocks. You can click the link below for the other two.
  3. Don’t panic. Despite Martin Wolf’s opinion that panic might be quite rational right now, investors mustn’t go down that path. Selling at the bottom of the market is the one thing you should never do. There may be a few days in the coming months when it feels like the global economy is spiraling out of control. That would be precisely the time to stand firm. I can remember never feeling as gloomy as I did during the first week of March in 2009. And that was exactly when the market began its very steep rise upward again.

So, what’s next?
I think most of us would agree that things look pretty grim at the moment. The eurozone is on the verge of collapse, and China appears to be slowing down. America’s political and economic problems are extremely serious, too.

In the long run, I remain an optimist — which is why I’m continuing to invest, even though it looks scary out there.

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The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by John Reeves, originally appeared on fool.com

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