Even though the Shanghai stock market fell 35% from June to July, given the panic selling in global markets recently, it’s now finally dawned on investors that the Chinese economy is really slowing down. Some economics even claim the large industrial nation is contracting. A slowing Chinese economy is troublesome 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. Even with the People’s Bank of China cutting lending rates, investors are worried that cheaper loans won’t be enough to help its slowing economy and in turn support collapsing Chinese stock markets. What’s amazing is that after a 60% rise in the Shanghai Index from January to June of this year, the Index, at the time of this posting, is now negative on the year! It’s been on quite a roller-coaster ride 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 11.5% last week. After Monday’s crash, the Index is down 38% from its peak on June 12. One of the most unfortunate parts of the Chinese meltdown is the number of families that have been completed wiped out as a result of crashing share prices. 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 what they were entitled to. Even though we haven’t seen that kind of mania here in quite some while, 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 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.
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 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, about 5%-20% of your portfolio gives you the ability to snap up deals, should they come about.
Secondly, at the risk of sounding like a broken record, diversifying your assets 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, many investors look into different asset classes such as oil and other natural resources, gold, timberland, commodities such as sugar and cotton, mature overseas markets such as those in Europe, and emerging economies. The 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.
Lastly, 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 owned and operated.