China has started 2016 off with a bang! Here’s what’s happened thus far.
- The Shanghai Composit Index (SCI) fell 11.96% during the week of January 1st through January 7th, making it the worst week in the history of the Chinese stock market. One contributor to the decline is that Chinese authorities began the week using newly installed circuit breakers – mechanisms that temporarily suspend trading when a certain loss percentage is reached – to try to regulate the large swings in the Chinese market. These circuit breakers were triggered both on Monday and Thursday, halting trading and causing panic. This gave investors time to place additional sales before the market reopened. So after the circuit breakers were triggered, there were more losses once trading resumed. The circuit breakers have since been suspended.
- Chinese authorities devalued the yuan again on Thursday, January 7, 2016, in an effort to boost the economy and encourage more Chinese exports. It was set to 6.5646 yuan per US dollar, the lowest valuation the yuan has had in just under six years. The yuan was previously devalued in August of 2015 which sent a negative shock through global markets.
- On January 7th the Chinese Securities Regulatory Commission announced a 3 month ban on stock sales by large shareholders. These shareholders were just about to have their previous stock sales ban from 6 months prior expire the next day.
All of the volatility in China is making global investors nervous as the effects from China spread to markets worldwide. According to USA Today, “Both the Dow and S&P 500 have posted their worst ever four-day start to a year.” And the MSCI All-Country World Index declined 5.3% in just the first week of the year.
So considering all of this turbulence, many are probably wondering if China is still a worthy investment. The more important question is, “Should I invest at all in 2016?” Keep in mind that no matter when you begin investing, there is always the chance for growth or for loss; however, over the long term (10+ years,) the odds of your investment having grown over that time are VERY high. In 2012, Marc Lichtenfeld of U.S.News wrote the following about U.S. stocks:
Including dividends, the average return over ten years since 1937 has been 127%. The past seventy-four years were filled with wars, a Presidential assassination, resignation and impeachment, an oil shortage, double-digit inflation, a terrorist attack and a financial meltdown. And despite it all, over ten years, markets were up 91 percent of the time and on average, investors more than doubled their money. In the past, it has taken a historic financial collapse not to make money in the stock market over ten years. And […] even then, there’s no guarantee that the markets won’t appreciate.
Our view is that in the next 10 years we are likely to see stocks earning a positive return just as it almost always has, though our research indicates that U.S. stock returns are likely to earn a lower than average return. Foreign stocks are better priced than U.S. stocks, so they may earn a higher 10-year return that is similar to historical averages.
It helps to think about your long term goals. Why do people invest? We invest to ideally gain a return on an investment. ALL investments have risk – every single one. This includes China and all foreign and domestic investments. Even storing cash under your mattress has the risk of losing purchasing power. A well-diversified portfolio helps minimize the risk of any individual investment. And having a sound investment strategy helps keep you on track when things are tough. But if you are able to stick with your investment strategy during times of losses, which takes a lot of patience and fortitude, you’re likely to reap the benefits down the road. Contact us today to take the first step.
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