How to ride out market volatility

How to ride out market volatility

First Published: ADawnJournal.com Aug 7, 2008

Unless you are living under a rock these days, you're concerned about the recent market turmoil. Investors all over the world have been losing chunks of their portfolios every day. I remember that I stopped looking at my portfolio at some point and since then I have been checking it very infrequently. Poll after poll shows that the majority of investors are pessimistic about the future and they are making changes in their portfolios based on emotion and fear, not based on a calculated decision.

The most common action they are taking? Switching out of equities and parking money into money market products. Equities are at their lowest at this time and switching out of equities may cost you a lot more than you can possibly handle. It is never recommended to get rid of equities when they are at a heavy loss. Now, naturally, you are going to ask, "If we're not to get rid of equities, what could we do to ride out market volatility?" My number one suggestion would be: do nothing. Yes, indeed – do nothing. Just sit back, relax, fasten your seatbelt, and ride out the market volatility.

If you are not convinced yet, consider the following points:

  • Diversification is the key to achieving stable returns throughout the good and bad times. A well-diversified portfolio should not fluctuate to the same degree as stock markets.
  • Volatility is a normal part of investing. There will always be ups and downs in the market. Do not let market volatility divert your focus away from your goal. Stay invested, keep adding more money, and you will be fine in the long run.
  • Investment is a discipline. Do not make decisions based on emotions. Research has shown that the stock market has averaged an annual 11% rate of return over the last 120 years. Stay invested for the long run – through good and bad times.

I would like to end today's article with a quote by legendary investor John Templeton. John Templeton recently died at the age of 95. He was famous for this quote: "Buy at the point of maximum pessimism." Templeton's quote makes perfect sense—whenever there were declines in the market, the market eventually recovered with greater gains. Investors who acted emotionally lost the most. That's why my advice is: Do Nothing. The market will recover and you will be in good shape again. Just be patient and ride out the volatility.

China’s Plunging Foreign Reserves

Yuan Continues to Outflow

Chinese currency remains worrisome to the global economy as Yuan continues to outflow causing declining foreign exchange reserve. As the Yuan is losing value, Chinese consumers are rushing to exchange them for U.S. dollars to preserve their value.

As there is a limit of exchanging Chinese currency annually to $50,000, consumers are trying to get around this rule by buying other tangible assets such as real estate, fine art, expensive wine, and so on. Another popular method to get around this rule is to use the quota of other people who have room and sometimes paying to use their quota.

The Chinese government is intervening in the market to stop rapid depreciation of Yuan by selling dollars and buying Chinese currency. However, this intervention is causing the plunging of the foreign exchange reserve. Chinese authorities are assuring everyone that there is nothing to worry about and these fluctuations are normal economic conditions.

January data shows that the foreign reserve declined by $12.3 billion to $2.9 trillion. Also, debt is rising rapidly and growth in GDP is slowing down. And there are more things to worry about as President Trump made it a priority to balance the trade deficit with China. China has been running trade surplus with the rest of the world persistently for the last decade. The USA had a trade deficit of $347 billion in 2016.

A declining Yuan, slowing GDP, and rising debt will likely contribute to bigger surplus as exports to China will suffer the most from all these.