Strategies for uncertain times
02-27-07: The market is in panic mode today. The DOW is off 200 378 416 points and the NASDAQ is down 70 96 points. The sell-off in China overnight has spooked investors across the globe. The Shanghai stock exchange dropped 9 percent, the largest percentage drop in a decade. The fear of global recession has investors up in arms and people are dumping stocks in an attempt to salvage any gains they have. Is this just an over reaction or a sign of hard times ahead? Here are some strategies to consider during these uncertain times:
Correction is normal: The stock market has been breaking record highs over last few months. The market cannot keep appreciating at double digit rate forever so a correction is probably in order. Therefore, we would not panic. This is probably a knee jerk reaction.
While it is too early to tell what will happen, it would be wise to review your portfolio. Look through your portfolio and take profit where it is appropriate. If you are up 100% on a position, sell 50% and lock in that gain. You can always buy them back once things settle down. Sitting back and hoping the market will come back up would be a big mistake. If there is one thing that is certain, the market will fall faster than when it appreciates. Cash is king during bad economic times.
Go on Defense: In this type of market, it would be prudent to also consider adding defensive stocks to your portfolio. Stocks like Wal-Mart (WMT), McDonalds (MCD), Procter and Gamble (PG) are likely to do well during a recession. We would sell the growth stocks with high P/E ratios as these stocks are usually the first that will get hit the hardest during a recession. A lot of the technology stocks are in this category. If you portfolio is tech heavy, make sure you re-evaluate your positions.
Buying opportunity: Use this opportunity to buy the stocks you have been eyeing. If the company’s fundamentals are sound and their business is doing well, this would be a great time to buy it at a discount. Companies such as Halliburton (HAL), Honda Motors (HMC) and Microsoft (MSFT) are all companies we would consider buying more at this point.
Globalization has brought the world much closer, what happens half way across the globe now impacts us directly and almost immediately. As more American companies expand overseas, we will encounter more and more of these types of volatility. The important thing is not to make irrational decisions. Continue to do your homework and look for opportunities. Best of luck!
