Few, if any, market strategists could have foreseen the manner in which crude oil prices collapsed in the past few weeks. In fact, most were still predicting that oil prices would rise, given the on-going conflict in Iraq and the civil war in Ukraine. Up till May, crude oil was still holding steady at around US$110 a barrel. Oil prices have since plung to below US$60 a barrel.
Lower oil prices have a huge impact on big oil producers such as Russia and Venezula because they need oil revenue, while on the local bourse, the shares of rig-builders and marine-related plays face selling pressure from investors worried about oil majors cutting back on their expenditures for drilling activities. Falling oil prices had resulted in net oil producers such as Russia and even Malaysia currency lost in value. Food Empire will probably affected badly by the falling Russia rouble.
Asian stock markets stayed in exuberant mood ending this week on growing hopes that the United States economy is recovering and the interest rate will not rise soon. One key catalyst for the optimism was the US Federal Reserve's pledge midweek to be patient in raising interest rates. It's only a matter of times interest rate will increase. Here are four practical steps we can and should take now to prepare for the inevitable.
1. Rebalance your portfolio
- Trim back your equity positions and add to other assets that have lagged. Every asset class moves in cycles - and rebalancing is a proven way to boost your returns while reducing overall portfolio risk.
2. Gravitate toward value stocks
- Growth stocks are excellent investments, especially early in a bull market. But they carry higher valuations and when growth starts to fade, look out below. Value stocks, by comparison, are companies that are cheap relative to their sales, earnings, dividends and book value. They not only generate superior returns over the long term, they do it with a higher margin of safety.
3. Focus on larger companies
- small companies tend to outperform early in a bull market and larger ones do better "on the back nine." This bull is now a senior citizen, so it's a good time to shift your holdings away from riskier, more volatile small caps and toward large caps. Or, better still, megacaps, the world's largest publicly traded companies.
4 Adjust those stops
- I see something eerily familiar happen with each bull market. Investors - fully understanding how trailing stops protect both their principal and their profits - start to get complacent. They quit ratcheting up their stops. They start complaining about the stocks that went back up after they stopped out. And so they quit using stops... just when they need them most. A bear market takes the market lower than most people think it will go. (Often 40% or more.) Stopping out early keeps your profits from slipping through your fingers. It may also mean you realize a small loss. But it keeps small losses from turning into unacceptable ones.