3 May, 2007
When is a market movement severe enough that we need to act immediately ? When should an investor jump to make changes to their long-term investment plan ? How much decline is simply too much ?
On 27 February, 2007, the Chinese market fell approximately 9%, in one day, lead by Shanghai. Wow. Should I have leapt in, called my clients, sold some or all of their Chinese and Asian investments immediately, in an effort to avoid an even bigger loss ? Gotten the widows and orphans out ? Never have put them in ?
Well, after a lot of thought, careful consideration and about 4 hours of anxiously watching the markets without blinking, I did nothing. It was not easy. It is much easier at that point to succumb to the “Sky is falling” mentality, jump in and make a lot of transactions. Save our ship !
However, we always have to remember that there are two major risks in the markets. We tend to only think of the first risk: losing money. We often fail to consider the at least equally important second risk: not making money. Panic trading is a good way to lose from both risks.
This is what the Shanghai market looked like about a month later. It had already more than recovered from a clearly very, very bad day.
As of the end of April, it was looking even better, with an increase of approximately 26% from the day before the 9% crash.
Was I correct to stay invested ? Well, as of today it looks like it, but markets are unpredictable, so it is extremely hard to ever really be sure of anything in the short-term. Which is why my basic investment philosophy remains the same: invest for the long-term in a well-diversified portfolio, avoid knee-jerk reactions, try to anticipate long-term changes and prepare for them through portfolio evolution, not revolution.
In this light it is very interesting to look at a short-term and then a long-term comparison between the Chinese market and the Canadian market. A one-year comparison follows:
Clearly, over the past year, Shanghai has strongly outperformed Canada. Should we all jump onboard with 100% of our portfolios ? Well, let’s take a long-term view first. The next graph is the same comparison, over 5 years.
A very different impression, to say the least; Canada has done as well over 5 years as China has, and with a lot less anxiety (risk). Perhaps we should sell all Chinese investments and put everything in Canada ? No, that doesn’t really make sense either.
Repeat after me: “invest for the long-term in a well-diversified portfolio, avoid knee-jerk reactions, try to anticipate long-term changes and prepare for them through portfolio evolution, not revolution.”
Jean L. Freed
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