Tuesday, March 26, 2013

Why Average Investors Need to Watch Cyprus – Average Investor – Anyone with a pension plan, 401K or Other Modest Retirement Savings Accounts.

Cyprus - those citizens attempting to make withdrawal on accounts where banks are closed while the government restructures its debt - from the Guardian UK -

There is a good deal of gloom and doom portrayed by certain “financial wizards”, warning of an economic meltdown in 2013 which will affect the U.S. – Some of the predictorshave a history of being right – for example, Peter Schiff, who had accurately predicted the 2007 financial crisis (IVN.us), others, who capitalize on those who would be “preppers”, propose dire scenarios where one would need food and protection from one’s neighbors in order to avoid starving. The reality is more likely that if one is investing, or has someone investing for them, in a retirement plan, the old card playing “know when to hold them, know when to fold me” adage may come into play here. Better safe than sorry.

When one takes risks, with modest investments it is not without a sense of gambling with the stock market – it is exactly that as small depositors invest weekly savings – in the same manner that large investors do, with differing results. As American’s we understand that the Social Security System has been used by the government for purposes other than the original intent, and that under most circumstances, the pittance one receives in monthly benefits once retired, barely covers expenses, so it is imperative that one has a “backup” plan in place, no matter how small. How many American’s wish they had invested in savings with a modicum of risk when they were in their 20’s or 30’s when one thought that the Social Security system would be sufficient to carry them to a modest yet comfortable retirement? As the bull market – (or market that makes continual gains) must, at some point, lose a few points, here and there (the law of averages) – Therefore with the Cyprus national debt, and the so-called restructuring of that debt, has already affected the Market in the U.S. (See Reuters article “Wall Street ends lower on renewed Cyprus worries”) If one is holding Euro or US risk stocks in their 401K, it may be time to be prudent and move those investments into a less risky group of funds.

By no means is this blogger any type of financial wizard, frankly, just the opposite, however, a modest 401K can grow over the course of 20 years, into a supplement for any benefits that may be available through the Social Security Systems which most working individuals have paid into (along with the companies for which they have worked) for years. So what’s with Cyprus? Cyprus is a small country with less than one million people, who’s national debt is similar to most European socialist nations, whereby the government has huge overhead, with little income – the principle of the socialist system is one whereby the government takes in taxes as revenue and then distributes those funds to the state workers, and those citizens covering everything from health to utility bills. (Sound familiar?)When the nation’s pension plans and other benefits are more than the taxes they can take in, the whole house of cards collapses. In the case of Cyrpus the nation made a financial bailout deal with the Eurozone (which regulates European currency) – in this case, the nation has closed its banks to prevent depositors the ability to remove funds, and will be assessing a 40% levy on all accounts in order to pay its portion of the debt. Many of those investors are from other nations, and stand to lose billions. One must understand that the majority of those who’s funds are in the Cyprus banks, the citizens, have no access to accounts, and once they do, they will find modest savings depleted (Telegraph UK).

How does this affect the U.S. economy and ones savings? As we have a global economy and companies as well as the U.S. government have investments in overseas banks (normally in the form of bailouts), the end result is that anything that goes wrong in Europe or Asia impacts the U.S. Markets, and anything that might go wrong in the U.S. has the same global consequences. Therefore, should Cyprus be the tip of the iceberg, and Italy, Spain and Greece follow suit, one can anticipate a strong reaction from the U.S. Markets.

However, a simple rebalancing of one’s account, taking less risk in the short term, might be worth looking into – now. Amidst all the dire predictions, one might want to speak to their financial adviser, or the guy who handles your individual 401K, and get their take on investing in less risk for the time being. Once the dust settles and it will, then it will be time to move into more aggressive investments offering higher returns, for now, smart money for those with modest savings are less overall risk.

This blogger, again, has no financial background, however, strongly advises that those who have savings for retirement speak to an expert in the field, and pay attention to what is taking place on Wall Street, in European and Asian markets, daily, in order to make sound decisions that may impact ones future. It is the same scenario as those who believe that Politics are boring, yet complain when the outcome of an election and subsequent consequences are not what they had hoped. Educate oneself as much as possible, and in addition, ask questions of those who have a level of education in a given field, and get second opinions – it is really not that complicated – boring, yes, but not that complicated.

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