Worried About The Market? Take These Five Stepsmarcuss
Markets all over the world are falling…
Since U.S. President Donald Trump went on Twitter accusing China of backtracking on trade talk progress on May 6, the Chinese stock market has fallen 3.8 percent.
The U.S. lost 3.6 percent, while emerging markets and Asia (excluding Japan) both fell by more than 7 percent.
Since the U.S.-China trade war began on March 22, 2018 (when Trump fired the first round of tariffs on Chinese exports), China is down 17.7 percent… emerging markets are down 15 percent and Asia (excluding Japan) is down 13.7 percent.
What’s going on?
The U.S.-China trade war has now spilled over from tariffs to outright restrictions on Chinese companies’ ability to buy U.S. technology.
Huawei, China’s largest smartphone manufacturer and mobile infrastructure developer, is being locked out of vital U.S. technology it needs to do business.
Surveillance equipment and drone manufacturers in China, like Hikvision and DJI, are also being targeted with export bans by the U.S. – preventing them from acquiring components on the premise their products could be sending sensitive data back to the Chinese government.
And this war doesn’t just affect China and the U.S.
Today’s smartphones, laptops, TVs, cars and most other popular gadgets are made with a bevy of components sourced from different countries.
The typical Huawei smartphone, for instance, uses memory chips from Taiwan, computer processors from the U.S., vibrating modules and built-in cameras from China and glass from Japan.
In a world that’s grown accustomed to globalisation and free trade, the news has sent markets tumbling. And with the trade war showing no signs of slowing down, markets will likely remain very volatile in the days and weeks ahead.
So now is the time to make sure your portfolio is protected from whatever happens next. Here are five steps you can take right now to protect yourself…
Never put all your eggs in one basket is the basis of every sound investment strategy.
The idea behind diversification is simple. It means spreading your risk across different types of assets, so that a decline in value in any one holding isn’t so bad – because there will likely be other holdings that rise to help balance out the losses.
You see, owning stocks, bonds and real estate all in one country exposes you to enormous risk should the country go through a major political upheaval.
And during this time of volatility, make sure you’re exposed to investments in markets that could do well during a trade war (i.e. Vietnam, Bangladesh and Indonesia – where low-cost Chinese manufacturing has been shifting to).
Two sectors in Asia have also continued to generate positive returns (of 5.4 percent and 0.9 percent) during the trade war. I’m talking about energy and utilities – two traditionally defensive sectors, where business remains stable.
If the trade war continues or worsens, these are sectors you want to own.
- Stick to your stop-loss levels
Stop-loss levels are an essential part of any investment strategy. No one likes to admit defeat. But in investing, it’s important to have a disciplined approach to selling your bad positions.
They take the emotion out of investing. Holding on to a stock just because you don’t want to – or are unwilling to – take the loss is almost a sure-fire way of opening yourself up to even bigger losses down the road.
The best kind of stop loss is a trailing stop.
Here’s an example of how it works: if you bought a stock at US$2.00, you might set your trailing stop at 20 percent below that level, or US$1.60. In this case, as long as you stick to your trailing stop, you’ll protect yourself against far greater losses.
On the other hand, let’s say that same stock climbs US$2.20. As the shares rose, you would continually adjust your trailing loss level to 20 percent below the market price. At US$2.20, your sell level would be US$1.76. If the shares rose to US$3.00, your trailing stop would stand at US$2.40.
- Keep some cash on hand
Holding cash is one of the simplest ways to hedge your portfolio against a market downturn.
It doesn’t pay anything significant in terms of interest. But it generally holds its value. Unless you’re living in a hyperinflation economy, a dollar today is still a dollar tomorrow.
And if you’re holding U.S. dollars, which tend to gain value during tumultuous periods, you’re in a good position to wait out the storm.
Having a good amount of cash on the side (cash that you won’t need to use any time soon) also enables you to take advantage of the rare bargain situations that emerge during times like we have today.
- Own gold
When markets fall, gold usually goes up.
Over the last 40 years, for instance, the U.S. has seen seven bear markets (i.e. when stocks fall by 20 percent or more from their highs).
Six out of seven times, gold rallied during those bear markets. The average gain for gold during these seven bear markets was 8 percent, compared with the 27.7 percent average loss in stocks.
That’s because during times of uncertainty, gold has proven to be a permanent store of value.
It’s the one hard asset that cannot be debased by governments, unlike fiat (paper) money, which can be printed in unlimited quantities (and devalued).
No matter what happens to the global economy, gold will always have value.
- Don’t try to catch a falling knife
A lot of investors want to buy at the lowest possible price and sell at the highest possible profit.
But just because a stock has fallen 30 percent, doesn’t mean it can’t fall another 30 percent (or more). When that happens, you’ve already lost half your investment.
Don’t think you can outsmart the market and get ahead of a potential turnaround sooner than everyone else. That’s simply a roll-of-the-dice.
Investors are better off waiting until a stock has bottomed (and tested that bottom) before adding to a position or starting a new one. Waiting for a reversal (when a stock changes its trend – from down to up) might mean foregoing some gains, but it also greatly increases your chances of success.
Editor, Stansberry Pacific Research