We shouldn’t be surprised when markets act irrationally. For example: when U.S. treasuries were downgraded by Standard and Poor’s they actually went up in value. And of course the stock market sold off.
When you think about it, why should an event like this cause the stock of a company to fall in value? Is Apple Computers (for example) really worth less today than it was a couple of weeks ago?
Are people all over the world going to stop buying iPhones all of a sudden?
Probably not, but on the other hand, the downgrade could have economic consequences. For example, interest rates theoretically could rise, leaving consumers with less money to spend — hence a potential economic slowdown.
And what if the economy does lose steam? Given the debt situations of the U.S. and many European countries, there is not a whole lot that governments can do to get the economy moving again.
So yes, it is possible that sales of things like iPhones could slow down, which could mean lower profits for Apple, and potentially a lower stock price.
But at the same time, if the economy does slow down, interest rates could fall (or at least remain low). So then your bonds go up in price.
Or, if it appears that government debt situations will continue to worsen, it stands to reason that your gold would do well.
So really, as long as you are diversified, an economic slowdown is something your portfolio should be able to withstand.
Chances are you will do better when the economy is strong, but as long as you are diversified, you should do just fine even when it isn’t.
Am I suggesting that a diversified portfolio will never fall in value? Of course not. There are times when investors react to their emotions.
They sell in a panic and move to cash. At times like this, even the best investments often fall in value.
Then, once all the panic exhausts itself, markets normalize and investments with good fundamentals return to their rightful values.
That is when you breathe a sigh of relief – as long as you didn’t panic and sell.
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Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only Raymond James Ltd, member Canadian Investor Protection Fund. For more information feel free to call Jim at (250) 594-1100, or email jim.grant@raymondjames.ca. or visit www.jimgrant.ca
