Every week I read a large number of personal finance and investing articles. Here’s my latest weekly shortcut to the best.
Part one of this series introduced crisis investing and looked at the opportunity to profit when vague fears affect the stock market.
But how should you react when a specific event makes headline news?
Some events can be very significant for both history and stock markets, such as the fall of the Berlin Wall or the two Gulf Wars. Yet their long-term consequences are hard to anticipate.
For instance, German reunification following the collapse of their Berlin Wall actually depressed the German economy for several years.
In contrast, Bush Sr. and Jr.’s two Gulf Wars saw stock markets decline until the onset of hostilities, and then rally hard when war broke out.
Specific significant events can provide opportunities
‘Buy on the sound of cannons, sell on the sound of trumpets’ is one of investing’s less palatable maximums, but one that makes sense in the context of the uncertainty discussed in part one.
While individual companies might well profit from war, I don’t believe buying on the cannons reflects a blood lust at the heart of capitalism.
A financial story gathering steam is the alleged miss-selling of structured investment products that ‘guaranteed’ your capital was safe.
The issue concerns products ultimately backed by Lehman Brothers, the failed U.S. investment bank.
Since what is left of Lehamn Brothers may be unable to honor its commitments as the underwriter of certain elements of the products, investors’ supposedly 100% secure capital is at risk.
The BBC’s Working Lunch program has been on the case:
On page four, under the heading “Full repayment of your capital at maturity”, you are reminded that the plan is “100% capital secure” and that you are investing in something with “growth potential without risking your capital”.
What you wouldn’t expect after reading all of the above is to be informed that all your money may have been lost due to the collapse of the US investment bank, Lehman Brothers, just weeks later in September 2008.
You didn’t even know Lehman was involved.
Investors’ capital is always at risk with every investment, but the word ‘guaranteed’ has a hypnotic affect on people.
In reality no investment product is ever guaranteed. It’s always about risk versus return.
Most Mexican commuters won't be thinking about stock prices
Deciding how to react to a crisis like a potential flu pandemic, a natural disaster or war is one of the most controversial aspects of stock market investing.
Many panics, whether they affect the whole market or individual companies, turn out to be false alarms.
Even those scares that have substance often turn out to be less important than the market first anticipated.
In this article, I’ll divide panic scenarios into three categories, and discuss how I personally react to such scare stories when investing.