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Janet in Trading psychology,

Why grandma should be buying Greek stocks

Greek companies are a bargain, and belong in a diversified portfolio

arendschartgreecereally final

If you’re a regular Joe, Joanna, or Grandma Jones, and you think the collapse in the Greek stock market is nothing to do with you, think again.

And if you think that Greece is an incredibly “risky” situation that is best left to the “professionals,” you might want to park that thought somewhere it deserves — like the office wastepaper basket.

What does the Greek crisis mean for people like you (or me, for that matter)? Simple. It’s a very simple, easy and obvious way of improving our likely long-term investment returns.

What is beyond dispute is that many stocks in Greece are at this point incredibly cheap by almost any measure.

Math, logic and a great deal of financial research argue that most of us should be allocating a few percentage points of our total stock portfolio to the Greek stock market right now. Even if we don’t manage an “active” portfolio. Especially if we don’t, actually.

Contrary to conventional “wisdom” and popular delusions, such a move is neither “risky” nor complex. Indeed it’s relatively easy.

But I’ll bet almost nobody takes advantage — more’s the pity.

Few things are as little understood as investing, and rarely are they as misunderstood as when they are most interesting and useful. Like now.

The modern cult of “target-date” funds and “index funds” and “passive portfolios” has a lot to recommend it. But it also has its flaws, or limitations. Index funds, after all, are not an end in themselves. They are merely a means to an end. They are simply a way of owning a very widely diversified portfolio of stocks at a very low cost. Each individual stock is “risky.” But the more of them you own the more the risks offset each other.

Over the years, an enormous body of research has found any investor could have done even better than the standard U.S. indexes, such as the Standard & Poor’s 500, very simply.

In a nutshell, investors have earned higher long-term returns, and made more money, when they have invested globally (rather than just in the U.S.), favored unfashionable stocks that were inexpensive compared to underlying fundamentals such as earnings, dividends and net asset over fashionable stocks those were expensive, and favored unfashionable national stock markets around the world that were also inexpensive in relation to underlying fundamentals.

None of these findings is seriously disputed by anyone. At best, some “Indexers” have questioned how important these factors are — and whether they are really worth the added effort and cost of pursuing them.