Monday, March 14, 2011

Japan Quake Shows That Thoughts Should Be on Those Affected, Not on Investment Plans

By Larry Swedroe

The images of the devastation caused by the earthquake in Japan have been nothing short of shocking and heart-wrenching. My thoughts and prayers go out to those affected by this tragedy.

While I certainly don’t want to minimize or trivialize the magnitude of this situation, the economic impact of such as occurrence is something that must always be considered. The response from the global economy has been swift. As the Wall Street Journal noted, “Global companies in industries ranging from cars to technology started trying to assess the impact of the giant earthquake in Japan as operations were disrupted.”

Overwhelming crises like this happen far too frequently and are obviously unforeseen. These types of events are why Joseph Mezrich noted that, “Surprise is a persistently important factor in stock performance.” You can’t specifically plan for such an event to occur, knowing that you need to get out of the stocks of European reinsurers, which have been taking a significant hit on fears of losses resulting from the quake.

What you can do is plan for these types of events — whether they’re environmental like this one, political like the situation in Libya or economic like the situation in Greece last year — by diversifying your portfolio according to your plan and sticking to it, no matter how nervous the images in newspapers and on TV and the Internet may make you. You can also make sure your plan addresses the things you can control:

* The type and amount of risk you take
* The diversification of those risks
* The costs and tax efficiency of your portfolio

Then, you can stop worrying about how this will affect your investments and start thinking of much more productive, helpful and fulfilling things, such as how you can help during a tragedy like this.

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