WHITEBOARD: Exposure — not necessarily a bad thing

Paddy Hirsch Oct 21, 2011

Most people have dark thoughts when they hear the word exposure, but exposure can be beneficial — if it’s done in moderation, as I explain in this latest Whiteboard.

When I hear the word exposure, I don’t think good thoughts. To most of us, exposure means you’ve got hypothermia. That means you’re essentially freezing to death, so it’s a rather unfortunate choice of words. Because exposure isn’t necessarily a bad thing.

If you ever go out in the sun, you’ll know what I mean. The sun is a great source of Vitamin D, and a great source of good feeling for most of us. You want to keep the sun off your face, but a nice daily dose of sunshine on your arms and legs is really good for you.
However, if you stay out too long, you’ll get burned. But to paraphrase, it’s not the sun that burns people — it’s overexposure to the sun that burns people.

So what does that have to do with Greek government debt, you ask?

Well, Greek debt is a bit like the sun. And just like the sun, you only want to be a little exposed. In other words, you want to own just a little Greek debt — because owing too much can be really bad for your financial health. There may be some good reasons to buy Greek debt — the interest rate could be terrific, there may even be a guarantee! But if you have 75 percent of your portfolio in Greek debt, you’re overexposed: You own too much, in other words, because if things go wrong and Greek debt turns out to be worthless, your portfolio will be worth next to nothing.

And that will leave you, and everyone around you, badly needing a drink.

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