This Week's Bear Market & My Own Mental Accounting

Mar 2, 2007 by

When an event is rapidly developing, it sometimes pays to wait to observe the outcome before commenting. Thus, I have chosen to wait until the end of this week to comment upon the bear market that began on February 27th, 2007. Given all of my thoughts on mental accounting, you may wonder how I dealt with this change in the market.

February 27th, 11 a.m.: My portfolio was down 2.5%. The news mentioned that the market was down due to concerns of slowing growth in China and globally. I reacted by saying to myself, “Depressed stock prices are an opportunity to buy at a discount!” At this time, I did not feel that the depression was likely to last for a particularly long time, as the shock appeared to me to have been produced by the whim of investors. I reacted by buying shares of EWM (iShares Malaysia) and EWZ (iShares Brazil). I invested in Malaysia, as it appeared to have been particularly depressed at the time, albeit not as depressed as China. I had been considering investing in Brazil for some time to receive some exposure to Latin America. As the shock did not appear to have to do with Latin America, I figured that it was a good time to buy.

February 27th, 2 p.m.: By this time, my portfolio had lost 4% of the value that it had the day before. I looked at the value of my portfolio and said to myself, “Eh, this is how much it was worth in December 2006.” I framed my loss as simply the elimination of the gains of the previous six weeks.

February 27th, 4 p.m.: After my portfolio closed at about 5% below its value the previous day, I said to myself, “At least I didn’t lose any money. My stocks are now worth about what I bought them for in September 2006.”

February 28th, 4 p.m.: After the day’s rally, I was happy to see that I once again had a small profit, at least relative to the cost of my investments. While I was upset, as I could have made 5% APY investing in something safer, I was happy that I at least had made something and taken the risk.

March 1st, 4 p.m.: The market was once again down for me, in part due to my high international and Asian exposure. For the first time in the week, I felt that I had lost some money, and not just lost some profit. At this point, I had lost 1.5% of the investment that I had made in September 2006.
March 2nd, 4 p.m.: After another down day, I finished the week having lost 3% of the money that I invested in September. I said to myself, “Buckle your seatbelt; we’re in for a long ride.” It is clear that this decline will not go away overnight.

So, what do I plan to do? As I have many decades of life ahead of me, I have time to wait for the market to correct. My portfolio is globally diversified, and was shocked rather uniformly across all of the investments, although my investments in China (FXI) and India (INP) were particularly hard hit. Since I do not need rapid liquidity, the most sensible plan in my opinion is to wait this out, and if possible, to acquire additional stock at this market’s low prices. I had not anticipated that this depression in the market would last as long as it has, which is why I bought EWM and EWZ at the onset. Using “dollar cost averaging” may be wise in this sort of a situation to temporally spread out my investments. I usually only like to buy one and at most two stocks a month. (I’m not a big fan of buying shares of the same stock at multiple points in time, as if I were to do so with small amounts of money, I would have all of my profits eaten by commissions. Making many small investments works with DRIPs [dividend reinvestment programs], and does not work so well with shares of ETFs sold on the open market.)

4 Comments

  1. Christie

    I agree that you shouldn’t allow your investments to be eaten up by commisions. However, I am interested on your feelings about what percentage of your income you think is ideal for investing. Also, do you think your investments overall will rebound to be a higher rate than a savings account?

  2. Atis Jurka

    You had mentioned several posts ago that you were putting together a portfolio of funds you were calling World Basket- which showed a preponderance of Asian stocks, you were going to share what your final choice would be, but haven’t yet — with the market downturn over the last few days I was curious as to whcih stocks you chose and more importantly the rationale behind getting them and keeping them — is it political, potential for the future, etc. ?

  3. Debbie

    EWZ has had some amazing performance over the last 3 years, I’d grab as much as I can now.

  4. Debbie

    EWM on the other hand, Id be a little leery about. Even in 2006 when there was a lot of talk about this, it still wasn’t a great choice.

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