Why U.S. Investors Should be Concerned About the Fallout from Japan

The disaster in Japan and devastating human tragedy is something that should concern all world citizens.  U.S. investors should be particularly concerned about whether their investment portfolios are properly designed to weather the shock to the financial system and are designed to fulfill their investment goals despite the tragedy.

As we have seen with other shocking world events such as September 11, Katrina, the BP oil spill and the 2008 financial crisis, an investment portfolio can be decimated as the result of an external event unrelated to the stocks and bonds comprising the portfolio.  It is essential that investors, particularly those who are retired and conservative, have a portfolio that is properly allocated among different asset classes (stocks, bonds, cash, etc.) to recover from any market shock such as the one we have seen with Japan and the other crises.

Undoubtedly, virtually every investor’s portfolio declined at least in the short term from these various crises and some have never recovered.  If an investor has a portfolio too heavily weighted in risky assets such as technology or financial stocks, there is likely to be an inordinately large loss suffered during a crisis.  If an investor has a large margin balance, he or she may be forced to sell out positions at the worst possible time and lose the opportunity to wait out a recovery.

We have learned from Wall Street’s conduct during these crises, particularly the 2008 financial crisis, that Wall Street only looks out for their own interests, particularly generating fees and commissions.  Investors need to be wary of this and to make sure they understand what is in their portfolio and what risks they face from a world event.  A properly balanced portfolio will likely spring back to a fair value after a crisis recedes, but an inappropriately allocated portfolio will likely not.

Investors also need to be wary of “flavor of the month” sales presentations likely to come from brokers pitching alternative energy and “safe energy” sources and commodity plays during this crisis. It is common for scam artists to surface after a crisis. For example, in the middle of the BP oil spill crisis, the Securities and Exchange Commission alerted individuals and small businesses about potential investment frauds targeting those who receive lump sum payouts from BP.

A normal person doesn’t think that in a time of crisis, you rip someone off, take advantage of them. But that’s what scam artists do. The SEC said that scam artists may target victims with oil spill-related investment opportunities that promise high returns with little or no risk, or involve secretive or complex strategies. Members of religious or ethnic communities, professional organizations or other close-knit affinity groups were prime targets for these scams because of the high level of trust that often exists within these groups and their tendency to freely share information with one another.

So, be on your guard for “too good to be true” investment pitches. The best advice for investors is to do their homework, make sure their portfolio is consistent with their investment objectives and to be skeptical of broker pitches during a crisis.

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