Wednesday, January 23, 2008

Perspective Makes A Big Difference

What do you see

You could be panicking in the morning and sipping champagne in the evening - such is the current market sentiment. Intraday swings of 500 points are becoming common occurences. Traders are happy, investors may be a little nervous. When you get above the noise or in other words - view the same scene with a different perspective, the situation looks a lot different.

Is it really that bad?
Remember that the S&P index is up more than 60% over the last five years. Add emerging markets to this mix and you have sizeable gains sitting in your portfolio. SPY PerformanceIf you have a well diversified portfolio - what is the impact of the recent market correction on your portfolio? Probably very small.

When you consider the long term perspective - is it really that bad? Should you be panicking and liquidating stocks because the stock market has gone through a correction?

Can the Fed fix what ails the market?
Probably not. It's a well known fact that rate cuts have a significant lag - six months to a year before their full effect is felt. Beyond timing, the fed cannot make the subprime mess disappear or pull out the housing market from its slump. It took some time for the current mess to coalesce and it will take some time for banks to rid themselves of bad debt, for housing inventory to reduce and for consumer confidence to turn positive. The prudent investor should be focusing on the large trends affecting the economy and not be reacting to the volatile swings in the stock market.

"No matter how much the Fed cuts interest rates we are not going to see an appreciable pickup in home construction for a couple of years."
WSJ - Columbia Business School economist Christopher Mayer

No turning back
Are we "coupled" or "decoupled"?
Either way the fact remains that the world is changing. At least the emerging economic powers and their impacts are not fads but reality. We live in a global economy and there will be impacts when there are imbalances. But will the growth of China and India be impacted significantly if the US slips into a recession? Impacted - yes, significantly - probably not. When you think long-term, there is huge potential in the developing world and that perspective will serve you well over the years.

"It is the world’s fastest growing country and the biggest capital exporter; it possesses the largest foreign currency reserves and is already the world’s third-largest trading entity; it is the largest consumer of metals and the biggest emitter of carbon dioxide; and, quite soon, it will also be the world’s largest consumer of primary energy."
FT - China Changes the Whole World

So should I buy now?
If you have done your research. In which case you would have a price target that will support your analysis. And if the market is offering you a discount - then go for it. If you are influenced only by the media then there is a problem. The media is just pandering to the need of the moment - they have no interest in your portfolio. The perspective that matters now is personal accountabilty for your money and your investing choices. Read, observe, learn but then make your own decisions.

"Today it may still be too early to plunge in heavily, but for the first time in quite a while you can start to see some value out there, especially among blue chips and in some overseas markets."
WSJ - Finding Bargains Amid the Panic

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