Monday, October 3, 2011

Reacting to Concerns about Europe and a Double Dip Recession

I go away for two weeks and see my portfolio down by 10% when I get back? What's a prudent investor to do in such a situation?

In case you have forgotten the things we have talked about in this blog for the past one-and-a-half years (or if you're a new reader), the most important thing to do in situations like this is not to panic and not to sell. Then, if you have both bowels of steel and a bit of extra spending money left, buy to strengthen your position, which is exactly what I did at the end of today's trading session.

It's been close to two months since I said and did pretty much the same things, and the PSEi has been down 9.3% in the same period. If we just spend a couple of moments to think about it, if you believe that two months ago was a good time to buy, then by the very same reasons, today should be a much, much better time to do it.

By most accounts, even if the world economy enters a recession in the coming months, stocks would still be inexpensive by historical standards. This is a sign that investors overreact when they migrate capital from equities to "safer" assets like cash and treasuries. Remember, the best way to make the most out of your capital is to go against the flow and do exactly the opposite of what everyone else is doing.

To help you better rationalize this counter-intuitive way of thinking, dwell on this. Most probably, one of your biggest concerns right now is whether to upgrade to an iPhone 5, get that new Kindle, or maybe finally buy your own car. I would bet that people around you, like your family and close friends, think about similar issues most of the time. My point is that, a European financial crisis and/or a double dip recession notwithstanding, you're doing fine. And so are the corporations that provide you with the things that you need and want. So why would these companies be worth 10% less all of a sudden?

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