Greece has decided to hold a referendum on whether to accept the austerity terms accompanying another Eurozone bailout package.
Cynical negotiating tactic, or empowering the people to make the right decision for Greece?
It's tough to say, but with Greece's GDP in 2013 some 10% lower than it was in 2006 – and still falling – the country has to face hard questions about its future. Everybody knows there's only so far you can run on debt before something's gotta give.
(Motley Fool analyst Mike King gives a thorough overview of Greece's spending crisis and the upcoming referendum in his review here)
Unfortunately for us ASX investors, we're already feeling the side-effects of the 'Grexit' drama.
The ASX in free-fall
The problem with all the media coverage of the Greek events is that it's easy to start panicking.
For example, I can't see a single compelling reason why Coca-Cola Amatil Ltd (ASX: CCL) shares should be worth 2.3% less than they were on Friday – especially when they're not even exposed to the Eurozone!
Less confident investors are most at risk in a gyrating market, so I have prepared a brief checklist that all investors can use to evaluate their investing strategy in the event of further Greek-inspired market upsets:
1. Educate yourself on the stocks you own
Do they make any money in the Eurozone? If so, are they likely to be affected by a Greek default or exit? Given that the Euro is expected to fall and the US Dollar and Aussie Dollar expected to rise, how will this change earnings? Is a company likely to sell less of its product in the event of a recession? I believe that most ASX stocks won't experience much of an impact (if any) to their underlying business from a 'Grexit', even if currency earnings may be affected.
I believe that most ASX stocks won't experience much of an impact (if any) to their underlying business from a 'Grexit', even if currency earnings may be affected.
2. Do you have a long-term focus?
How important is a single bad week in the context of a five or ten-year investment? You'll probably have dozens of them. Stock investors have done alright in the past despite a number of market crashes – the dot-com boom, GFC, etc – and you will too if you can look through today's news to the future.
3. Protect your portfolio (mostly from yourself!)
Do you own stocks that are likely to grow earnings for the coming decade as a result of attracting more customers, expanding their product offering, being able to charge higher prices, or a combination of all three?
That's a good place to start. If you had a fair idea that stock XYZ was going to grow earnings at 5% a year for the foreseeable future, would you care if its price dropped 30% along with the market tomorrow? You might, but you shouldn't because stock XYZ is going to be earning 27% more per year in five years time, and I can guarantee that its share price will recover along with it.
Just look at how well Aussie stocks bounced back in the five years after the GFC.
Having cash on hand to stock up on bargains also goes a long way to soothing a portfolio that's heavily in the red. The fact of the matter is that companies with quality management, a sound balance sheet, and a long-term business model are winners, and market crashes are just an opportunity by another name.
