Earthquake, Tsunami and Nuclear Disaster

Earthquake, Tsunami and Nuclear Disaster

By:Elaine E. Bedel - President , Bedel Financial Consulting

Category:Personal Finance

Our thoughts and prayers go out to the Japanese people. Particularly to those who have lost loved ones and to those involved in containing the crisis.
Obviously, we do not know how long it will take for Japan to work through this crisis and to look ahead at this time may seem insensitive. But, our role as investors requires us to look ahead in order to determine if any changes to our strategies are appropriate.
The following comments are based on what we know now. As the situation changes, the potential outcomes will also change.
Volatility in the Japanese Market
Because of the leaked radiation and concerns for further significant harm, the Japanese stock market has experienced significant volatility, which has spread to a lesser degree to the rest of the world. Japan is the third largest economy in the world. Understandably, the Japanese government and businesses have pushed back many economic priorities in order to focus on more pressing issues. As a result, Japan’s economic activity has slowed and, therefore, it is anticipated that the growth of their economy will slow down until the crisis is reduced to a manageable level.
The social and cultural impact of the catastrophic events will be significant for many years. However, the overall economic impact of this crisis is likely to be significant for Japan for only the next few months. As rebuilding begins, this activity could actually act as an economic stimulus, with positive signs perhaps as early as the end of 2011.
The reason the overall impact could be less than expected is that the affected region in northeast Japan only represents approximately 4% of Japan’s GDP. This means that 96% of the country’s businesses are continuing at a somewhat normal pace. Likewise, it is estimated that the disaster is impacting only 10% of Japan’s electricity supply. (source: JPMorgan). For these reasons, it is anticipated that the global impact could be even less significant.
Global Impact
Individual companies will be affected for different reasons, but the impact on most global companies could be relatively small. Some industries will be impacted, like those tied to nuclear energy and the auto industry.
Countries will not be able to shut down their nuclear power plants. More than likely, the future building of plants will be delayed until we regain our confidence in nuclear energy as a preferred energy source. As more facts become known about Japan’s nuclear industry, the U.S. can reaffirm its policies or make changes to improve the safety of these plants domestically.
Most cars sold in the U.S. are assembled in the U.S. Many parts, however, come from Japan. There will likely be disruptions in the parts availability that will affect Japanese and U.S. auto manufacturers. However, our manufacturing economy, which has been growing at a robust rate, still has some slack and our companies should be able to ramp up their manufacturing and be able to offer parts to make up for this drop in supply. This is what entrepreneurial markets do.
What Should Investors Do?
For investors, during times such as these, it is important to stay focused on the long-term investment strategy appropriate for your portfolio. Should asset prices decline in particular areas, such as with international stocks, you can be ready to purchase investments at attractive prices. However, we do not recommend selling assets when prices are falling significantly. To paraphrase Warren Buffett, smart investors should buy when everyone is selling and sell when everyone is buying.
When catastrophes have struck in the past, the short-term reaction is usually much different from the long-term result. Eventually, both countries and companies adapt, allowing economic growth to press forward. In Japan, this will happen more quickly than you might expect. The Japanese are known for their resiliency and their passion for taking care of their own.
Summary
To try and understand what our friends in Japan are going through is difficult and weighs heavily on our hearts. However, for a moment, if we are able to separate our emotions from our finances, we may agree that the long term economic impact will not be as significant as people fear. Investors, who are selling today out of fear, may have regrets tomorrow. That’s usually how it works.
This article was contributed by Bill Wendling, CFA, who serves as Chair of the Investment Committee and as a portfolio manager at Bedel Financial Consulting, Inc.
Elaine E. Bedel, CFP®, is president of Bedel Financial Consulting, Inc., a wealth management firm providing fee-only financial planning and investment management services for individuals, consulting services for corporate retirement plans, and investment advisory for institutions and endowments. She is the author of “Advice You Never Asked For…But wished you had!” available on Amazon.com. For more information, visit their website at or email to .