Crunch time in Europe: What should investors do?

[June 18, 2012]  CHICAGO (AP) -- It's gut-check time for investors. Again.

Greek elections on Sunday kicked off two potentially tumultuous weeks in the European debt crisis. Once the two weeks are behind them, investors still face a stretch of slow -- or no -- growth in the global economy that could last for years.

Market momentum has evaporated in recent weeks, causing many investors to recall last summer's alarming dives when the debt-ceiling stalemate in Washington took hundreds of points off the Dow Jones industrial average.

Concern over a widening of the European crisis only heightened last week as Italy and Spain saw their borrowing costs surge. There's even been some uneasy chatter among investors about whether the potential exists for "another Lehman Brothers" -- a reprise of the financial firm's collapse at the heart of the 2008 financial crisis, with Greece playing the role of Lehman, perhaps to be joined later by Italy and Spain.

The risk of Lehman II appeared to lessen on Sunday, when parties that support the terms of Greece's bailout agreement won enough votes to form a coalition government.

But average investors are still asking: What should I do to protect myself?

The standard advice is to avoid doing anything rash, such as suddenly pulling your money out of stocks to guard against a worst-case scenario. For long-term investors, reacting to headlines is rarely the right move.

BACK FROM THE BRINK

A victory by the anti-bailout party, Syriza, in the Greek election could have sped the country's exit from the euro and caused world markets to tumble -- as much as 15 percent, one analyst speculated.

That risk is off the table, at least for now. But any rally in stocks should be short-lived, analysts warned on Sunday.

Among the reasons: There is still no long-term solution to the European debt crisis. And even if Greece can form a coalition government, Greeks remain deeply opposed to the harsh budget cuts demanded by their European neighbors in exchange for bailout money.

Still, those who retreat into cash and don't come back for a while risk hurting their portfolios. After the market hit bottom in March 2009, the S&P 500 rose 50 percent in about six months. Many investors weren't in the market during that run, never quite confident enough to jump back in.

"This is not something where you change your investing strategy," says Pat Dorsey, president of Sanibel Captiva Investment Advisers in Chicago. "People are looking for the next Lehman, but the odds of a global credit crunch like we had in late `08 coming out of this are much, much lower than the markets have priced in."

EVENTS TO WATCH

Here are upcoming dates for investors to keep in mind, to gauge whether progress is being made in the crisis and watch for incremental news that could cause market swings:

• Monday and Tuesday: Leaders of the world's 19 largest economies plus the European Union meet in Los Cabos, Mexico.

• Tuesday and Wednesday: The Federal Reserve meets with speculation swirling that it could extend "Operation Twist" to spur growth, which is scheduled to expire at the end of the month. That's the Fed program to sell $400 billion of the Treasury securities that it owns that mature in less than three years, and replace them with longer-term securities that mature in six to 30 years.

• Thursday: Finance ministers of the 17 euro countries meet and are certain to discuss a pledge of $125 billion to rescue Spain's banks.

• Friday: Leaders of the four biggest economies among the euro countries -- Germany, France, Italy and Spain -- meet in Rome.

• June 28: Leaders of the European Union gather in Brussels with financial markets poised to jump if they agree to new measures to fight the crisis.

ADVICE FOR INVESTORS

Investors should try to keep fear and hunches out of any decisions involving their stocks.

- Those in their 20s and 30s should ride this one out without tinkering with stock allocations. With decades to go before they need the money, odds are in their favor.

- Those who intend to tap stock accounts in the next year or two, perhaps for their children's college tuition or retirement, may want to exercise more caution by reducing the percentage of stock funds in their 401(k) accounts.

Abandoning stocks because of this crisis would be a mistake, however. Sticking with the market generally is rewarded in the end.

SAFE BETS

One relatively safe bet in the market is companies that make products and provide services that people buy no matter how bad the economy gets.

Think food companies, drug store chains, tobacco companies and makers of things like laundry detergent and toothpaste. These companies are up a respectable 2.6 percent over the last three months. The S&P 500 is down 4.3 percent.

Or you could stick to companies that pay high dividends -- in many cases, more than double the 1.6 percent that 10-year Treasury notes are paying. Look for the dividend yield -- how much a company pays per share per year divided by the stock price.

Telecommunications stocks, such as cellphone providers, have an average dividend yield of 4.8 percent, best among the stock groups in the S&P 500. Utilities have an average dividend yield of 4.2 percent. For the whole S&P 500, it's 2.4 percent.

That's one reason the Dow Jones utility average is up a strong 4.8 percent since the start of April.

[Associated Press; By DAVE CARPENTER]

AP Business Writer Christina Rexrode in New York contributed to this report.

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