How do you protect your stock portfolio during turbulent markets?

August 11th, 2006

August 11, 2006 -

In mid-2006, the global markets corrected a great deal. In the U.S., the Dow plummeted 4%, the Nasdaq about 6%, and the S&P 500 about 5% in a single week. European stocks posted their biggest drop since May 2003, and the FTSE 100 in the UK had its biggest two-day loss in 3 years. And that was just the beginning of very turbulent times in the global stock market that destroyed billions of dollars of capital. On the other hand, in Asia, as of May 11th, the HK Hang Seng index was up 22%, the South Korean index up 55%, the Australian markets up 31%, and China was up 50% over their 12-month lows before these markets also corrected with the global market correction in the past 7 days.

In addition, the U.S. was allocating $2 billion to shore up its borders, major conflict still was raging in Iraq and Afghanistan, and Venezuela had increased the top royalty rates on oil to 33% from 16.67% after raising this rate from just 1% in October, 2004. In Bolivia, Evo Morales had followed his friend Chavez’s lead in protecting national assets, and nationalized his country’s oil and natural gas resources. And in Mexico, political unrest, according to Subcomandante Marcos, was the worst since 1994 as Mexico neared its next Presidential election. Still that wasn’t even the worst of it.

In Iran, the threat of nuclear confrontation with Israel and the United States loomed, and in the U.S., record trade deficits, a falling dollar, and another bad expected hurricane season (due to global warming) waited ahead.

So What is an Investor to Do?

Well despite, the general negativity of all of these conditions, I still believe that we may see the worst to come. Why? Just read the paragraph above. So in response, I have been shifting significant portions of my clients’ assets into several areas for protection. When these severe market corrections occur, the biggest mistake individual investors make is to panic sell during these market corrections and then buy back in after the market bounces back significantly. That’s the worst thing you could do - Sell low and buy high -yet millions of investors responded exactly in this manner. But yet if you are mainly invested in Europe and the U.S., you need to rebalance your portfolio now because you will be punished for such short sightedness in the remainder of 2006.

Recently, friends asked me to take a look at their portfolios and to provide them with advice. I see a lot of local portfolios (i.e. if the investor lives in the U.S. almost all the stocks our American stocks, if the investor lives in Thailand, almost all the stocks are Thailand stocks, if the investor lives in London, almost all the stocks are U.K stocks, etc.). These are the types of portfolios that will get punished over the remainder of the year and the remainder of their life. I recently read an article about a big producer at another American firm that recently shifted 70% of all his client’s assets into China, but all through Chinese mutual funds. I hate mutual funds, and the thought of owning mutual funds in emerging markets (but that’s an article for another time). People should always own stocks, not mutual funds. Mutual funds are the lazy way out and you’ll get punished for being lazy. It’s just not the way to benefit from these rapid growth markets.

So where should your money go? Due to all the political unrest, I’m looking at the defense sector. Due to continued globalization and the threat of new epidemics, I’m also looking at the healthcare and pharmaceutical sector. And due to all the geopolitical unrest, I’m looking at precious metals. Geographically, I’m looking for continuing opportunities in China of course, as well as some in Brazil, Mexico, Vietnam, France, Australia, the U.K. and Canada. And the only U.S. companies I’d invest in other than the defense sector would be companies that have very wide global expansion initiatives.

But I can’t discuss these all, so until next time, follow the MoneyMites™ to make more money.

Bruce Lee once said “Be like water.” Why? Because water is soft enough to take the form of whatever container it fills yet is strong enough to reduce a huge rock into sand with time. As a martial artist, one must practice techniques with enough repetition that they become instinctual. There are no conventional rules, like panther fist to the throat for attack A, ridge hand to the temple for attack B, elbow to the bicep for attack C, and vertical fist punch to the xiphoid process for attack D. Different situations, even different attackers in the same situation, call for different measures. Investing is the same. Turbulent times call for the abandonment of conventional investing and new strategies. Stick to a rigid game plan during abnormally volatile and unstable global markets, and you’ll invevitably be rewarded with the significant losses you deserve. So in investing, just like my man Bruce says. “be like water”.

Entry Filed under: The Peak Investment Crisis & Stock Market Crash, The Zen of Investing, Wealth Literacy