Over the last two weeks, the markets faced a sharp decline. During these times, the initial reaction of retail investors is to sell-off all of their equity holdings in fear of another market crisis or recession. This is a very natural behavior because many of us are loss adverse and don’t want to experience major loss again.
I would like to remind my readers of Warren Buffett’s famous line that I used in a previous article, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” To summarize that article: investors should not be making adjustments to their portfolios based on short term events without a thorough analysis of the long term contributing factors. In other words, we should try to resist the “call of the herd”.
Investment management is truly a passion of mine, and I have been doing this for the last decade. During volatile periods like this, a lot of my clients come to me with their concerns and uncertainties. As a financial professional and Senior Contributor of NAI500.com, I am happy to provide my thoughts on strategies we should be taking during these trying times. So, please don’t hesitate to send an email to me or leave a question/comment below.
Before I discuss how you should position your portfolio to take advantage of this downturn, let’s review the two major events that occurred in the last two weeks that led to where the markets are today.
The social media platform suspended data analysis company Cambridge Analytica for allegedly harvesting data from more than 50 million users and assisting with President Donald Trump’s 2016 campaign. Specifically, the information was used by Cambridge Analytica to create 30 million profiles that were allegedly used to unethically influence the course of the 2016 election.
The breach of personal information definitely startled many users that led to major advertisers ending their relationship with Facebook and users around the world abandoning their accounts. The fear is that their personal information will be used unethically and advertisers don’t want to be associated with Facebook’s business practices. The potential decline in its user base, decline in ad revenues as well as the increase in political risk have made investors wary about the long term value growth in the company.
Donald Trump decided to impose tariffs on Chinese imports in the amount of up to $60 Billion partially to penalize China and partially to attempt to balance a $375 billion trade deficit with China. China, naturally, retaliated with its own tariffs against the US and we now have what looks like the beginnings of an old fashion trade war. Perhaps all of this began as a face saving measure for Trump during a tough period of investigations and lack of legislative progress. However, regardless of the reason, the effects on the market have been apparent.
The Dow Jones Industrial Average down 724 points or 2.93% on Thursday, and the rout continued in Asian markets. The Nikkei 225 in Tokyo closed 4.51% lower, while shares in Hong Kong fell 2.45%, the CSI300 in Shanghai lost 2.86% and the Kospi in Seoul was down 3.37%. In Australia, which exports more iron ore to China than any other country, the ASX200 benchmark index was off nearly 2%.
Remember that I mentioned that it’s not all doom and gloom during times like this and one should only make adjustments to their portfolio after finding fundamental changes? Well, assuming that we aren’t in the midst of a complete market meltdown, smart investors should pay attention equities that are backed by strong balance sheets, business models and management teams. In addition, they should also look at growth type of equities. The reason is that, when things settle down, these are the ones that are going to start doing better the fastest.
Joseph Tang is an Investment Advisor at BMO Nesbitt Burns and holds the Chartered Financial Analyst (CFA) Designation. He has been working in the financial industry for over a decade. His passion is to provide comprehensive wealth management strategies and build customized investment portfolios for his clients. He firmly believes in fundamental investing and in active management of assets by adapting to constant changing economic conditions. Furthermore, proper diversification in asset classes, industries, and countries is vital to achieve sustainable wealth for his clients in the future. Joseph Tang can be reached through his email address: [email protected]
Read more articles from this author:
For New Chinese Investors in Canada – RRSP vs TFSA
Fundamentals of Investing in Equities
Deriving Passive Income in your Portfolio
7 Major Risks of Investing in Bonds
6 Common Myths Preventing You from Investing Correctly
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