How To Build Wealth During Turbulent Stock Markets, Part I

Posted by Nick Niesen on November 8th, 2010

There is Much Greater Geo-Political Instability Today than 20 Years Ago

In mid-2006, the global markets corrected a great deal. In the U.S., the Dow plummeted 4%, the Nasdaq about 6%, and the S&P 500 about 5% in a single week. European stocks posted their biggest drop since May 2003, and the FTSE 100 in the UK had its biggest two-day loss in 3 years. And that was just the beginning of very turbulent times in the global stock market that destroyed billions of dollars of capital. On the other hand, during this time, in Asia, the HK Hang Seng index was up 22% for the year, the South Korean index was up 55%, the Australian markets were up 31%, and China was up 50% over their 12-month lows.

Then for the rest of the year, the U.S. and global markets grew even further and almost every investor had long forgotten about these drops until a historic 9% single day drop in the Shanghai markets triggered a global market decline in the 1st Quarter, 2007 (though the explanation truly is not this simple).

When we experienced the first drop in 2006, the U.S. was allocating $2 billion to shore up its borders, major conflict still was raging in Iraq and Afghanistan, and Venezuela had increased the top royalty rates on oil to 33% from 16.67% after raising this rate from just 1% in October, 2004. In Bolivia, Evo Morales had followed his friend Chavez?s lead in protecting national assets, and nationalized his country?s oil and natural gas resources. And in Mexico, political unrest, according to Subcomandante Marcos, was the worst since 1994 as Mexico neared its next Presidential election. Still that wasn?t even the worst of it.

In Iran, the threat of nuclear confrontation with Israel and the United States loomed, and in the U.S., record trade deficits, and a falling dollar waited ahead.

Well despite the recent bouyancy in the global markets, I still believe that we may see the worst to come. Why? Just read the paragraph above. Nothing much has changed in 2007 from back then regarding the above. So in response, I have been shifting significant portions of my clients? assets into several areas for protection. But not just for protection but to profit greatly when more turbulence hits.

When severe market corrections occur, the biggest mistake individual investors make is to panic sell during these market corrections and then buy back in after the market bounces back significantly. That?s the worst thing you could do - Sell low and buy high -yet millions of investors responded exactly in this manner. But yet if you are mainly invested in Europe and the U.S., you need to rebalance your portfolio now because you will be punished for such short sightedness when other major corrections occur in the future or if this current one continues after a slight bounce higher this past week.

So What is an Investor to Do?

The first thing one needs to do is to stop listening to the advice of large investment firms. Investment firms will tell you that it?s impossible to time the market and that to remain fully invested at all times is a much better strategy. First of all, if you go back and read my blogs for the past couple months where I repeatedly warned people to prepare for a market correction, and specifically told people to start buying inverse funds on the U.S. index you?ll know that it is possible to predict market corrections. After all, I wasn?t the only person saying this.

The reason most investment firms tell you that it?s impossible to market time is that often they don?t get paid on non-invested assets, and even when they do, who would ever want to pay management fees on cash? Recently, friends asked me to take a look at their portfolios and to provide them with advice. What I saw was predominantly domestic portfolios (i.e. if the investor lives in the U.S. almost all the stocks our American stocks, if the investor lives in Singapore, almost all the stocks are Singaporean stocks, if the investor lives in London, almost all the stocks are U.K stocks, etc.). These are the types of portfolios that will get punished again in the future.

I remember reading an article in 2006 about a big producer at another American firm that shifted 70% of all his client?s assets into China, but all through Chinese mutual funds. I hate mutual funds and the thought of owning mutual funds in emerging markets (but that?s an article for another time). People should always own stocks, not mutual funds. Mutual funds are the lazy way out and you?ll get punished for being lazy. It?s just not the way to benefit from these rapid growth markets. In fact, I?m fairly certain that when the Chinese markets corrected these past couple of weeks , all of this manager?s client portfolios were severely punished.

So where should your money go? Due to all the political unrest, I?m looking at the defense sector. And due to all the geopolitical unrest, I?m looking at precious metals. Given the global market corrections, I?m looking for continuing opportunities in China of course, as well as some in Brazil, Mexico, Vietnam, France, Australia, the U.K. and Canada. However, the best protection in turbulent markets is really yourself.

What do I mean?

The single most critical factor for building wealth is undoubtedly to learn how to do it yourself.

If you think about it, when was the last time a friend of yours ever told you, ?my financial consultant saved me so much money during these recent corrections it?s unbelievable!?. All I ever heard when I worked at these firms during strong downturns, was ?every single one of my clients is down 25% this year.? Yet I know lots of individual investors that manage their own money that will come out of these recent corrections just fine.

To tell you the truth, the best protection your stock portfolio has against a strong market downturn is your own brain. Financial consultants that work at large firms neither have the time to adequately protect your portfolio against strong downturns and the bottom lines of the firms they work for are not adequately motivated by protecting accounts against market turbulence.

When turbulent markets happen, all the myths that global investment firms propagate are exposed. Market timing is bad; diversification is bad; foreign markets are risky; and asset allocation, not individual stock selection is important- all come to light for what they are ? myths. Even if the Shanghai markets corrected 9% in one day of which some of these losses were recently recouped by rebounding markets, this correction is irrelevant if all the stocks you?ve bought in the Chinese markets were up 70% to 100% at the time the correction came.

During turbulent times, you?ll see that diversification is not important, but that selecting the right individual stocks in the right individual markets at the right time is what is truly important. Most financial consultants will try to spin losses by saying that diversification saved your portfolio from further losses, but the fact of the matter is that if they had been focused on the right stocks in the right asset classes in the right markets, instead of possibly having all profits wiped off the board by this recent correction for the fiscal year 2007, you would still be sitting on some decent profits. So what?s the best advice I can give you for protecting your stocks during turbulent times? Three words - Do it yourself.

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Nick Niesen

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Nick Niesen
Joined: April 29th, 2015
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