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Stormy seas on markets -- time to buy, sell, hold or jump?

Stormy seas on markets -- time to buy, sell, hold or jump?

Colin Bloodworth

There is no question that for investors right now there is a lot of bad news out there.

When we talk about buy, sell or hold we are usually talking about stocks and stock markets. There are other asset classes to consider but let's look at stocks first.

Although they are capable of bouncing back as quickly as they fall, global stock markets have taken quite a tumble in recent days. The following are some of the items of bad news that have been dragging them down:

- The now infamous sub-prime market, where mortgage loans to people who could not afford them have led to thousands of foreclosures and falling house prices in the U.S.

- The web of interlinked products and funds that have collapsed or created billions of dollars of write-downs for major banks around the world.

- The fact that the problems may be much worse than has so far been revealed.

- The resulting credit crunch making it harder for companies and individuals to raise or borrow money.

As if the mortgage situation wasn't bad enough in itself, there are other big problems out there such as the price of oil, which is getting very close to US$100 a barrel, a price considered unthinkable only a short time ago. The high price of oil is adding heavily to industry's and consumers' costs in most countries. Perhaps consumers in Indonesia are less aware of what is happening because the government is continuing to subsidize fuel, but the subsidy is becoming a heavy burden for the country to bear.

The price of oil is both affecting and is being affected by the fall in the U.S. Dollar, now down to a record low against the Euro and long time lows against other major currencies. The falling dollar may be good news for foreigners planning a trip to Disneyland or buying American products but it is not good news for other economies that sell their products to the huge US market.

It looks bad -- should we jump ship?

Only if you think the situation is as bad as it was on the Titanic when it hit the iceberg. If you stay on board will you go down with it? Do you think you would stand a better chance of survival and rescue in icy or shark-infested waters?

Perhaps not such a good option. Just stay on board and consider the history of the markets. Periodic turbulence for one reason or another has always been part of the deal. But in every single case the markets have come back on top and there is no reason to believe that will change in the future. The fact is, if they kept going down indefinitely the world would be led into recession, then depression and finally financial collapse. No use putting your money in the banks. They would have collapsed also; look how little it took in terms of the sub-prime issue to wipe billions off the books of some of the big players.

Experienced investors take market turbulence in their stride. Shrewd investors welcome and take advantage of it.

Looking on the bright side

Despite the wealth of bad news there remains a lot of good news out there. Unemployment in the U.S. is still very low. So long as people have jobs a recession is unlikely. Economic growth is still strong in India and China and the latter's thirst for commodities is in turn creating a boom in countries such as Australia that are supplying them.

As I reported a couple of weeks ago, the consensus of a team of leading fund managers at a convention in New York was that we are probably going to hit a rough patch but once this has worked through the system we should see a return to strong growth.

So should we sell, buy, or hold?

There's really only one good time to sell stocks or mutual funds invested in stocks, and that is when you are taking a profit. The ideal time is when prices are at their highest but that is a near impossible call to make. So if you think you have made a good profit at any point in time by all means take it, unless you want to hold on for the longer term and see a higher profit. So sell.

What if your stock or fund is down say, 10 percent? If you have previously made say, 50 percent on it and you don't want to see your gains further eroded then sell.

If you only recently bought the stock or fund then the worst thing you can do is panic and sell. In this scenario it is important to hold.

If you are not in the market and you are prepared to invest for the long term then a 10 percent drop may be justification to buy. It may fall further but at least you are buying at a 10 percent discount on the price of a couple of weeks ago.

So there you are; the advice at any given time could be to buy, sell or hold at the very same price. It all depends on the situation of the individual investor. The reason so many people lose money in the stock markets and in mutual funds is that they buy, sell or hold at the wrong times. The most successful investors have the courage to buy when things look bad, hold as long as it takes, and that might mean years, then sell when the profits are in the bag, no matter how attractive the investment may have become.

Remember the sage advice of the world's most successful investor, Warren Buffett: Smile when you read "Investors lose as markets fall" and edit it in your mind to read "Disinvestors lose as markets fall, but investors gain".

What about savings plans?

By savings plans we are talking about regular, usually monthly, investments into a range of mutual funds principally invested in the world's stock markets. A personal pension fund will be much the same. Each month a fixed sum buys a variable number of units in the funds. This means that when prices fall more units are bought and vice versa.

It is very common for people to abandon these plans during times when markets are depressed. People do not like to see the value of their investments falling and are reluctant to throw new money into the pot. This is usually a grievous mistake as it is at these times that new contributions should be pouring into the plans. The advice here has got to be both hold and continue to buy.

The time to sell is again when significant profits are in the bag. In the case of long term savings plans the selling can take the form of switching into other asset classes such as bonds or conservative hedge funds in order to preserve the gains. New contributions may continue to go into the stock market funds if the plan has some time to go. This is known as separating "old money" from "new money".

What about other asset classes?

The same principles apply. I have strongly recommended oil, energy and gold over the past few years and they are now at record highs. If you have doubled or trebled your investment in these assets you should be taking some profits. You have probably missed the boat for further massive gains in the short term but if you are looking long term there are certain to be more big gains further down the road. Just a word of caution. The last time gold went over $800 an ounce it fell back to the $300s and stayed there for 20 years! If you don't get the timing right, you may need a lot of patience, although a repeat of that particular episode seems unlikely. As always, it is very important to diversify.

So there you have it. You can now decide whether to buy, sell or hold. If you still can't make up your mind, there is no room for indecision in investing, so feel free to jump!

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