By Craig Cirbus, Dopkins Wealth Management, LLC

Did you see the Greek debt crisis coming? If so, how did you respond? Did you sell your international holdings and overweight U.S. holdings?

Like the rest of us, you probably did not describe the Greek debt crisis as a crisis until … well … until it became a crisis. And unfortunately, as investors, that’s too late to advisably shift from international to U.S. holdings. The markets already have responded and priced future trades accordingly.  

For example, a year ago, you could have bought a two-year Greek note worth an expected reward of approximately 4 percent in annual interest. As of this writing in early June 2010, you have the same option, but the annual yield has jumped to almost 9 percent. Is that a better or worse investment today? It is certainly more risky. But it is also much more rewarding if it pays out as hoped for.

Whether prices go up or down, we advise our clients to respond to an international debt crisis the same way we advise them to respond to any crisis: by deciding well in advance whether or not to incorporate future risk into their portfolio strategies and to stay the course whenever the risk they’ve accepted shows up. We build in desired levels of risk through our global diversification strategy that incorporates all sizes (market cap), all prices (value, growth), all sectors and all geographies in a tactical, academic, risk-based approach. We are then as well-positioned as possible to accept the eventual byproduct of the Greek debt crisis, whether it turns into an enormous recovery or worsens into default.

That’s not to imply that an international debt crisis is not a significant event for investors. The Greek crisis that ignited in early May 2010 will likely be felt around the world for some time as it continues its slow burn. But for investors who have built their portfolios according to a long-term, globally diversified approach, making trades in reaction to the international news — good or bad — is far more likely to detract from than contribute to their long-term wealth.

Let’s take a step back and describe the current crisis (as of early June 2010). While not wishing to downplay the enormity of the events, we’ll explain why, from an investment perspective, the best course is to largely ignore them — and likely any new crises yet to unfold.

Greece joined the Eurozone in 2001. The Stability and Growth Pact (to which all Eurozone members agree) states that each country’s annual budget deficit remain under 3 percent of GDP and its national debt be lower than 60 percent of GDP. By early May 2010, Greece’s obligations had significantly exceeded these protocols, with a budget deficit of 13.6 percent of GDP (versus 3 percent) and national debt of 115 percent of GDP (versus 60 percent). As a result:

•     Greek officials agreed to drastically curb spending, overhaul national policies and comply with a bailout plan from the European Union that offered below-market, bailout loan rates for the next few years.

•     Greek public workers turned violent as the radical changes seriously threatened their livelihoods.

•     The market perceived the high risk and slapped increasingly high yields on those willing to invest in Greek debt (such as a 8.62 percent yield on a two-year Greek note).

    While other countries such as Spain and Portugal are more economically stable to date, markets remain jittery fearing a domino effect if the crisis worsens.

Will things worsen? Or will they right themselves and become another historical footnote? Of course, nobody knows the answer to that $10 trillion question. Try as we might, nobody can make that uncertainty go away. Instead, having a financial destination in mind and a logical investment plan to which to adhere seems to us the best course of action in an uncertain world.

Our advice is to use principled and disciplined portfolio construction strategies in advance, and stay the course. If you focus on this crisis or the next and wonder what you should do as a result, you’ll remain forever uncertain of where you stand with your wealth. In his May 17 CBS MoneyWatch blog, “Lessons Learned From the Greek Tragedy,” BAM Advisor Services Director of Research Larry Swedroe listed no less than 15 major financial crises that have occurred all around the world during the past 40 years. We would expect the future to resemble the past in this respect.  

Rather than reacting to each crisis as it comes along, we advise you to build a portfolio that incorporates the amount of risk you need to achieve your own clearly defined goals, diversify your holdings domestically and internationally to comfortably spread the risk and hold fast to that tiller when the winds of change blow. Because out there, beyond the horizon, your desired destination awaits, if only you stay on course.