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Financial Vision
J. L. Freed, mba

3 May, 2007

 

Dear client,

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.

graph1


As of the end of April, it was looking even better, with an increase of approximately 26% from the day before the 9% crash.

graph2

 

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:

graph3
000001.ss = Shanghai Composite                        GSPTSE = Toronto Stock Exchange

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.

 

graph4
000001.ss = Shanghai Composite                        GSPTSE = Toronto Stock Exchange

 

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.”

Best wishes,

 

 

Jean L. Freed

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