Stock Market Troubles - Three Ways to Protect Yourself
Stock-Markets / Risk Analysis Aug 07, 2007 - 09:28 AM GMT
Tony Sagami writes: Although they posted a heck of a rally yesterday, U.S. stocks have had a couple of rough weeks. The S&P 500 lost 7.7% of its value from its peak in the middle of July through last Friday. That was its steepest three-week slide since 2003.
Friday was an especially ominous day because the S&P 500 fell below its 200-day moving average. Many market watchers consider that a key technical level. Picture Wile E. Coyote running on thin air and you'll get an idea of just what this break signifies!
This is why most of the smart market timers I know believe the market's troubles are far from over, despite the bounce yesterday.
Whatever way you slice it, these are volatile times. So hopefully you have a solid strategy in place that gives you both peace of mind and protection against painful market drops.
If you don't, here are two to consider …
- Adjust your asset allocation — Now's a good time to revisit what percentage of your portfolio is invested in stocks, bonds, cash, etc. As Martin suggested last week, one way to reduce your exposure to stocks is by taking half profits in some of your positions.
- Implement stop losses — These orders tell your broker to sell your shares should they fall to a predetermined price. Only you can decide what prices you'd like to sell at, but many investors choose an acceptable percentage amount (say, 10%) and apply that to each of their positions.
Naturally, I'm also a big fan of diversifying into other fast-growing parts of the world, namely Asia. In my book, that's a third way to protect yourself from weakness in the U.S.
Heck, while the Dow lost 2.1% last Friday, the Shanghai Composite Index jumped 3.5%!
That move sent the Shanghai Composite to a new record high of 4,560. The Shenzhen Composite Index, which mainly covers China's smaller stocks, also hit a new high, rising 2.3% to 1323.
While the Dow plunged 2.1% last Friday, China's stocks hit new highs
It marked the fourth week in a row that Chinese stocks have advanced. The Shanghai index is up more than 60% this year, after more than doubling last year.
I'm not just cherry picking China, either. Last Friday, the Hong Kong Hang Seng Index gained 0.4% to 22,538 and the South Korea Kospi advanced 1.3% to 1876.
This doesn't mean that you're going to see Asian markets outperform U.S. stocks every single trading day of the year.
Quite to the contrary, if you look at it that myopically, you may even get the impression that they're not holding up as well. Step back from the trees and see the forest! Almost every major Asian market has been leaving the Dow in the dust, and should continue to do so.
In fact, here is the most important thing I want you to hear from me this week: The Asian bull market has years and years left to run.
To see why, just look at what Asian investors are doing right now. Their actions paint one of the clearest pictures you will ever see. Here's one example …
An American Construction Icon Gets Bought by South Koreans
Last week, South Korea's Doosan Infracore announced that it was buying Ingersoll-Rand's Bobcat division for $4.9 billion.
If you've ever hung around a construction site, you've seen Bobcat's loaders in action. These machines are one of the most versatile pieces of construction and maintenance equipment ever created. Their lift arms can be attached to a wide variety of labor-saving attachments such as backhoes, trenchers, and pallet forks.
Bobcat also manufactures mini-excavators, telescopic tool handlers, and portable air compressors. If there's an outdoor job to do, there is a Bobcat that can help you do it faster, easier, and better.
In short, Bobcat is an American construction icon. And it's a rip-roaring business that sold $2.6 billion of equipment in 2006.
Bobcat might be an American icon, but it's now owned by South Koreans
All of the red-blooded American construction workers I talked to weren't too happy to learn that Bobcat will be owned by foreigners.
But they better get used to it because the Asians have a bunch of money and are going to keep buying businesses.
And you know what? South Korean investors are just a drop in the bucket!
China has $1.3 TRILLION dollars (and growing) just sitting in the bank. Ask yourself what they'll do with that mountain of money. The answer is easy …
Look What China Has Done So Far: Buy, Buy, Buy!
China's first buying-binge salvo was fired in 2005 when Chinese National Offshore Oil Corporation (CNOOC) attempted to buy Chevron for $18.5 billion.
While that buyout ran into so much opposition that CNOOC walked away, it was the first signal that not only was America for sale but also that China had the wherewithal to buy it. More recent signs paint the same picture …
Earlier this summer, the Chinese government disclosed that it took out a $3-billion stake in private equity firm Blackstone Group. I believe the main reason that China bought into Blackstone wasn't to make a handsome profit but to watch, learn, and master the takeover business.
And just last week, the China Development Bank, a state-owned institution, invested $3 billion in Barclays, the British bank. It will also plunk down another $10.5 billion if Barclays wins the bidding war for ABN AMRO.
To me, this is the beginning of the Chinese buying spree. And as all this money is put to good use, the growth in Asia should just keep on coming. I'm talking about both real economic gains and more profits for Asian stock investors.
So remember, your financial feet aren't anchored in concrete. Even though markets look volatile right now, there are plenty of steps you can take to protect yourself … and plenty of places to seek out profits.
Best wishes,
By Tony Sagami
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