It’s a sea of red today across all Asian markets. Its not just Asian markets, Europe markets are down and US markets fell last night as well. Oil and gold prices are down too. US jobless claims turned out higher than expected, rocking US markets, then in Europe, the high debts run up by countries like Greece has investors worried it would spread to other European countries that has also run up large public debts. Notice that no mention is made now about China tightening anymore, because that’s old news already.
But should investors be selling out now? Ideally, most of us should already be in a diversified portfolio with some fixed income funds to help stabalise our portfolios. Bond funds don’t make as much money as equity funds, but they are worth their weight in gold during times like these. But unless your portfolio is in a big mess, now is not the time to think about upping your fixed income allocation just because it seems more stable now. Because when the market slumps like this and we switch out from equities into bonds, we are likely just selling out of equities at a low.
Ideally, when we rebalanced your portfolio previously at the end of the year, we would have taken profit from your equities or equity funds. Then now, we would actually be in a position to take advantage of the current volatility to look for bargains in the beaten down equities and slowly accumulate.
On my own personal portfolio, I just switched a quarter of my bond funds into equities. And if the market falls further, I will switch more. I work on a worst case scenario basis. Since we are not back to all time highs, and since markets dropped 50% in 2008, what's the maximum downside to markets? It could range anywhere between 10% to 30%. (Things would have to really collapse for it to fall below that).
Hence, I am prepared to switch gradually the rest of my bond funds into equity funds if the fall continues. This would be in proportion to the extent of the current drop. But even if it never reaches 30% down (in my opinion it won't), and it rebounds whether after falling 10% or 20%, that is fine.
The key thing to note is that in any kind of market slump, things eventually do turn around. Jumping in too early can hurt just as much as jumping into the market too late. But trying to time the exact bottom of the market is likely to be impossible as well. I think most people didn't dare to enter markets back in March 2009.
The main point I am trying to make, always have a diversified portfolio, with some amount into bonds or bond funds. This allows you to take advantage of exactly the market slumps like the one we are seeing now. Be patient, have the daring to go in slowly as everyone is selling out. There will definitely be bargains available. Investing is about not letting your emotions take hold, and also about being patient. Markets are very short sighted, they are falling now because everyone is selling. Although the picture could look very different 6 to 9 months later, markets can’t look that far out. All they care about is that in the immediate short term, US jobless claims numbers are bad, and Greece’s troubles are causing Europe markets and the Euro to take a pounding.
One interesting trend I have noted so far, is that Indonesia, Malaysia and Turkey are still holding quite up quite well. For Indonesia and Turkey, these two are interesting, while I would not have pegged them as strong performers in a year where external trade recovers, they will do well even if the external trade remains bad! That’s because Indonesia and Turkey have large domestic markets, and exports are a relatively small part of their economy. They are to a large extent “self sufficient”. So, it may be a good hedge to consider in counterpoint, even though I still think that external trade should recover this year.
Malaysia on the other hand, is mainly a more defensive type of market, and hot money flows more to other markets than Malaysia. Hence, when investors are spooked and hot money flows in the opposite direction, Malaysia suffers the least.
Well, the weekend is here. My switches will buy in on next Monday (the switch sells happened on Wednesday). I won’t know if Monday, thing are going to get better or worse. Short term fluctuations are notoriously hard to predict. However, I do know that at times like this, do not panic! When the market is frightened, as it is now, every news that comes out will see a negative spin in it. Don’t let it get to you. I doubt if the world will suddenly go into a huge U turn and plunge back into recession again. But it does look like the year of the Tiger is going to be a very bumpy one, so hang on tight! Just make sure not to let your portfolio become so exposed to risk that you can’t even celebrate the Lunar New Year without worrying about it.
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