Greece: The Questions Investors Should Be Asking

Will Greece default, or won't she? This seems to be the question on every
investor's lips, and the uncertainty surrounding the outcome has the markets
on edge. I have no inside information about how this crisis will be resolved,
and even if I had the phones of every European leader bugged, I'm not sure the
information gleaned would be particularly useful right now. The EU leaders
tasked with resolving this crisis seem to have no more of a grasp on the
situation than those of us on the outside. No one said investing is easy or that
it should be easy. Investing is an exercise in making difficult decisions under
conditions of uncertainty. If we knew the future ahead of time, there would be
no risk and thus no possibility for return or loss. The questions investors
should be asking are not "What will Greece do?" but rather "How will my
portfolio perform regardless of what happens in Greece?" and "Am I being
properly compensated for the risk I'm taking?" We'll answer that question
shortly, but readers should first understand a very important point: There are
two and only two risks that we as investors face every day: The risk of being
in an investment that falls in value. The risk of being out of an investment
that rises in value. We tend to focus on the first type of risk, and it appears
we are hardwired to do so. In their landmark 1979 study, psychologists Daniel
Kahneman and Amos Tversky found that people dislike losses 2.5 times more than
they like comparable gains, and most actually will engage in risk-seeking
behavior to avoid realizing a loss. Yet the second type of risk opportunity
cost can be equally damaging to your long-term financial health. If you pile
into "safe havens" like cash or Treasuries that yield next to nothing, your
standard of living is almost guaranteed to fall over time. A good investment
strategy should balance these two risks, offering decent upside potential while
keeping risk to a tolerable minimum. Given the pricing in today's market, this
actually is easier to do today than at any time in recent memory. Here are my
recommendation for the months ahead: Avoid or underweight traditional "crisis
hedges" like gold and Treasuries. This might sound counterintuitive given the
possibility of a euro meltdown, but hear me out. Treasuries already yield so
little, they appear to be pricing in the worst. At this point, even if the world
ends, bond prices can't go too terribly higher than they are now. And gold
appears to be in the late stages of a bubble . While there might be modest
downside protection here, there is virtually no upside, particularly in the case
of bonds. Avoid highly speculative sectors, mining and materials stocks,
commodities and banks. Should the current state of fear subside without major
incident, these sectors likely will enjoy a monster rally. But if we do have a
crisis, they will get utterly slaughtered. You have decent upside potential but
horrendous downside risk. Try overweight "boring" blue chips that you know
will survive anything . Lately, I've been attracted to the old "Wintel"
duo of Microsoft (NASDAQ: MSFT ) and Intel (NASDAQ: INTC ) see " The Ugly
Sister ." I also like consumer products maker Procter & Gamble (NYSE: PG ),
Kimberly Clark (NYSE: KMB ) and Colgate-Palmolive (NYSE: CL ), as well as health
care giants like Johnson & Johnson (NYSE: JNJ ). If we have another 2008-caliber
meltdown, these companies will survive it intact and will continue to pay solid
(and likely growing) dividends throughout. And if we avoid a meltdown, they
should at least match the broader market's upside. This is exactly what I like
to see: good upside potential with only modest downside risk. Greece might
default tomorrow, or against all odds the European Union might manage to salvage
their wayward member. But at current market prices, a portfolio of boring,
dividend-paying blue chips would appear to be well positioned for either
eventuality.