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Julian McLaren may be contacted on 0269377900

I have been Financial Planning for 16 years and what never ceases to amaze me is the amazing number of “crises” that constantly seem to be facing investors. Let me stretch my memory to make a point…going back to 1997. I recall…the Asian Crisis, the Russian Debt Crisis, the Y2K bug crisis, the tech bubble burst crisis, the 2nd Gulf War crisis, the Enron Crisis, the Sub Prime Crisis, the Lehman Crisis, the Greek Crisis, the PIIG’s Crisis, the Euro Crisis…and now we are facing the China Crisis.

OK, I guess I have missed a few moments of terror, but the point is, they all come and they all go. The current China Crisis is about the Chinese economy slowing down…or perhaps its about Chinese stock markets. I’m not actually sure. But what it demonstrates is that we are all very much open ears when it comes to doom and gloom. The media, the investment industry and economists who are paid to have opinions, are having no troubles extrapolating the current situation into more grander and extreme postures.

Here is what we already know.

1. The share market is risky. Without risk, we would not be able to achieve higher rates of return. If it was riskless, you would get the risk free rate of return (anywhere between 0% and 2% at the moment);
2. Despite this knowledge, there will always be investors that pile in when prices are at their highest, and panic and sell when prices are at their lowest;
3. There are industry participants that drive and amplify this behavior – namely short sellers and algorithmic traders;
4. Warren Buffet loves to remind us “be fearful when people are greedy, be greedy when people are fearful”.
5. The future is a series of unpredictable events.

So no one will (or can) tell you when the market hits the bottom, and no one can tell you when to sell at the top of the market. As a result, the only solution is to have a well diversified portfolio and certainly have an asset allocation that suits your appetite for risk and volatility. Bond prices have risen in the recent uncertainty so that is exactly how lowly correlated assets should behave in a diversified portfolio.

So with any luck your portfolio is well structured and diversified. You will certainly feel uneasy at times as the world can sometimes go mad around you. But as history has shown us, this will happen again and again, and the outcome will be the same. The world will battle on in spite of our ability to panic and imagine the worst.