A Bear Walks Into a China Shop…
After
the Shanghai stock market fell 35% from June to July, it finally dawned on
investors that the Chinese economy is really in some big trouble. Some
economists are even claiming the large industrial nation is actually contracting. A slowing Chinese
economy worries a lot of investors because the implication is greater price
deflation for commodity prices. One major reason why commodities have been
falling is China has been buying about 50% of the world’s commodities over the
last few years. The Red Dragon is also responsible for about half of the
world’s collective growth in Gross Domestic Product. Gross Domestic
Product is basically the value of all goods and services that are produced in a
nation.
Even
with the People’s Bank of China cutting lending rates (just like what we here
in the U.S. were doing for years), investors are worried that cheaper loans
won’t be enough to help its slowing economy and in turn support collapsing
Chinese stock markets. What really has investors’ minds spinning is
that after a 60% rise in the Shanghai Index from January to June of this
year, the Index, at the time of this writing, is negative on the year!
There’s been quite a free fall in Chinese stocks to say the least! Even with Chinese officials cutting
interest rates, banning the sale of shares by major shareholders, and forcing
state-owned companies to buy stocks, the Shanghai Index still dropped sharply
in August. One of the most unfortunate
parts of the Chinese meltdown is the number of families that have been
completely wiped out as a result of crashing share prices. It’s almost as
if China is repeating what happened here in the U.S. back in 2008 and
2009. Similar to panics we’ve seen in
the U.S. and elsewhere, a lot of speculators borrowed money to buy stocks in
the Chinese stock markets and when the walls came tumbling down, the lenders took
back what they could. Sounds familiar,
doesn’t it? I’m sure you know someone,
maybe even a handful of people that borrowed heavily during our real estate
boom last decade, only to lose almost everything. It’s been a while since we’ve seen a stock or
real estate mania here; 2008 and 2009 took care of most over-zealous investors
and speculators. But it doesn’t mean our
markets are immune to sharp declines.
So
what does this all mean to you? Well, if you’ve been brave enough to
check the value of your retirement accounts, it obviously means a lot and if
you got caught in the recent downdraft, as many investors have, you may be
forced to just tough things out or cut your losses and head for the hills if
you believe share prices in the U.S. and globally are headed lower. It
really just depends on how much risk you can tolerate. Without knowing if
and when markets will turn around, you should be reminded of some basic
money-management tools that will help you potentially weather future financial
storms. Please note though the ideas
I am putting forth are not meant to be taken as investment advice and it’s
advisable to consult with an experienced financial professional before
implementing any financial strategy.
Shanghai
Stock Exchange
1.
1.
For
starters, its usually a good idea to have some portion of your portfolio in
cash, just in case markets fall sharply as they’ve done recently. As the
saying goes, “the money is made on the buy” meaning if you can get near
rock-bottom or vastly discounted prices for stocks and other assets that may go
up in the future, then the probability of turning a profit is tilted far in
your favor. Depending on your tolerance for risk, having about 5%-20% of
your portfolio in cash gives you the ability to snap up any deals if they come
about.
2.
Secondly,
at the risk of sounding like a broken record, diversifying your portfolio into
different types of investments, in different economic sectors located in
different parts of the world may help to reduce your overall risk. Oil magnate
J. Paul Getty once said “Money is like manure. You have to spread it around or
it starts to stink.” So with that in mind, it may be worth your while to
invest in different asset classes such as oil and other natural resources,
gold, timberland, commodities such as sugar and cotton. Investing in overseas markets such as those
in Europe and emerging economies could also help balance out your portfolio. Your ultimate goal is to earn a rate of
return comparable to the historical average of the Dow, but at a lower level of
risk to your portfolio.
3.
Finally,
when it comes to investing, know when to cut your losses. It’s no fun
seeing an investment or an entire portfolio fall by 10, 20, even 30% or more in
the blink of an eye so if a 20% loss is all you can tolerate, make sure you’re
prepared to cut and run. A 20% loss isn’t the end of the world because
you just need to make 25% to get back to par. But if you lose 50%, you
have to earn 100% on your investments just to get back to even! Protecting
your downside is one of the keys to investing and speculation. Top money managers are seemingly obsessed with not losing money
because they understand how difficult it can be to recoup losses!
Securities and advisory
services offered through Ausdal Financial Partners, Inc. Member
FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807
563-326-2064 www.ausdal.com. Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are
separately
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