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Chuck Jaffe
Feb. 2, 2011, 4:45 p.m. EST
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By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) "” The political upheaval in Egypt hit many Americans in a funny way. Watching the crisis unfold half a world away, they started to wonder how the violent protests in the Middle East could affect their investment portfolio.
If you put all of the reactions together, the resulting school of thought was a bit like the action in Cairo, pure chaos.
Police use tear gas in Cairo's Tahrir Square as pro- and anti-Mubarak supporters clash. Video courtesy Reuters.
One faction of investors was ready to sell out and head for high ground, while another group thinks exactly the opposite and looks for buying opportunities. Some people think the news will cause oil stocks to take off, and others believe Egypt's problems will hammer anything oil-related.
Then there are investors who believe the trouble must crater the domestic market because we live in a global stock environment, and those who aren't sure if they should worry more about Egypt than they would if there was political unrest in Mexico "¦ or Rhode Island.
Put it all together and you have a lot of average investors who think they might want to act, but have no idea what to do.
There are two things those average investors know for sure: 1) The proverbial "smart money" "” the hedge-fund guys, the traders and the market sharpies "” has been playing this game hard (and probably getting squeezed pretty hard for being overly pessimistic while this story has evolved and the outlook has improved), and 2) No matter what they do, they could be leaving good money in the hands of those guys rather than making it themselves.
"You do get this eerie feeling that we are in the midst of history in the making, but we don't know how it's going to play out," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "There are two perspectives here: You either get defensive or offensive, you either protect yourself from what's happening or you look through the trouble looking for opportunities."
Truth be told, there is also a third option, namely sitting still and not changing an investment portfolio "” except for perhaps an allocation to emerging markets. From that point of view, Egypt is just the latest case where political risk has reared its head; last month, Tunisia's long-time dictator fled the country in the face of widespread protest. Jordan, Yemen, Algeria and Syria have subsequently seen protest movements picking up speed. Read more: What Egypt's turmoil means for your portfolio.
In response to that and to the troubles in Egypt, emerging markets have taken a bit of a step back; mostly, they have seen increased volatility. While average investors have been increasing their holdings in emerging markets in recent years "” largely because the economies of developing countries were churning forward while the developed nations were suffering "” the current political unrest does send a reminder to stay true to asset-allocation plans. When winners run, especially in a volatile asset class, they need to be pruned back, effectively taking some winnings off the table so that the next volatile stretch doesn't wind up wiping out those gains.
"It's like worrying about Greece, it's like worrying about Portugal or Ireland "¦ there's always something to worry about, but you don't want to make yourself crazy about it, and you certainly "“ if you're the average guy "“ don't want to react too strongly to it," said Ned Riley of Riley Asset Management Inc. in Marshfield, Mass.
"If watching news about Egypt makes someone want to make a big change to their investments, they'd be better off turning off the news channels and turning on the re-runs of NCIS," he added. Read more: Stock investors: Don't just do something, sit there.
The main impact on global markets from the fast-moving Egyptian situation comes more from the political uncertainty than anything else. So far there's been no disruption to traffic through the Suez Canal, and OPEC clearly has the ability to increase oil supply sufficiently.
There are some European nations with significant exposure to Egypt, but so long as the crisis eases soon, its global impact will be limited.
That would suggest that maybe there are some opportunities to take advantage of here.
"Investors always fear the worst and tend to overdo things to the downside," explained Ablin. "While that caution is always warranted, it does mean that this could be an opportunity to buy some beaten-down areas of the world."
It's also an opportunity to buy domestic. The Standard & Poor's 500-stock index /quotes/comstock/21z!i1:in\x (SPX 1,304, -3.56, -0.27%) trades at a better valuation than many emerging markets, and certainly without the political risk.
Ultimately, while the Egyptian situation does represent modern history in the making, the average investor will be better off not making moves based on what's happening, in either direction. Someone who's 50 years old doesn't have to worry about reaching age 65 and saying "That Egypt mess 15 years ago is why I have to work another five years."
"Sentiment in these situations changes on a dime, and by the time the average guy reacts it's probably too late," said money manager Tom McIntyre of McIntyre, Freedman & Flynn in Orleans, Mass. "There's no reason to feel desperate, but you had better understand what you own so that when things come up like this you can analyze it. If you don't understand what you own "” maybe it's a stock with exposure to Egypt or an emerging-markets fund that has always felt safe "” and something like this comes up, the only thing you are equipped to do is get scared and panic, and that's no good for anyone."
Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, "Getting Started in Hiring Financial Advisors," was published in the spring of 2010 by John Wiley & Sons.
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