With another key deadline looming, government officials in Cyprus late Sunday night fought through last-ditch efforts to save the troubled island nation's economy.
The European Central Bank and the International Monetary Fund finally agreed to terms over the $13 billion bailout needed to save the Cypriot banking system. Part of the deal includes the shuttering of the country's second-largest bank and big losses on depositors with accounts larger than 100,000 euros, according to Reuters.
Still, the global implications of the Cyprus situation are not completely clear right now. Some analysts believe a crisis of confidence in the banking system could spread throughout Europe. Other experts see the relatively small bailout as a contained event, merely a blip on the radar when compared to the overall health of the $70 trillion world economy.
But as an investor, how should you react to the new developments in Cyprus and the evolving eurozone financial woes?
It's tempting to try to time your investment decisions based on the big economic headlines. However, "trading the news" probably won't add up to better returns in your brokerage account. In truth, it's nearly impossible to plan an investing strategy around how you believe a news event will play out in the financial markets.
The "fiscal cliff" debate just a few months ago is a perfect example. The financial media covered the fiscal cliff debates around the clock. Some predicted that the lack of a comprehensive deal would end in disaster and send the stock market reeling. Both political parties missed crucial deadlines. And when an agreement was finally hatched, no permanent solution to the fiscal cliff was even a part of the deal. As it turned out, we had to wait until the sequester deadline for the main event -- and even then were left with countless questions about how the economy would be affected.
Yet all the while, U.S. markets continued to rally. If you sold over fiscal cliff fears in December, you would have missed a double-digit move in Standard & Poor's 500 index and the Dow Jones industrial average as the broad markets pushed toward new all-time highs.
Expectations have a big impact on how news is received. If investors are expecting the worst, even a not-so-spectacular resolution can buoy the markets. The next time you are faced with headline risk, don't put too much emphasis on how different scenarios might play out or how the outcomes might affect the economy.
Instead, take the time to review your investments, making sure your reasons for owning them remain true. Have a plan and your investing goals set ahead of time. Then, be sure to stick to your guns. That should help you avoid any regretful knee-jerk reactions to the financial and economic headlines.