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August 25, 2015

What should investors do after the mini-crash?

The equity markets of the developed countries dropped by more than 10% during the last 5 trading days. Developping countries reported even bigger losses, with China down more than 20% over the same period. What should investors do? We have put together two key points that help investors weather the storm. Use this moment as an opportunity to set your investments right.

Do you have the right asset allocation?

Use this historic rip to your advantage: see if you panicked. If yes, reduce equity risk. If your portfolio on the other hand aligns with your true risk tolerance and spending horizon, do nothing.

We often get asked what is the best investment stratetgy. The answer: the one you are likely to stick with. There is no point in ramping up your equity exposure because you want to get the highest return if you then sell during the first panic and lock in the losses.

Every time we see a stock market correction we see a corresponding surge in opinions about what investors should do. But if you have a plan in place you should be able to almost immediately recognize which advice makes sense for you.

Do you have the right product?

Indexfunds (ETF) have been very popular recently and we also view them an excellent solution for long-term investors. However, that doesn’t mean all indexfunds are necessarily good. Due to home bias, we often find that investors pick an ETF that covers their domestic markets. In Germany for example, the top 3 ETFs are all ETFs on the German index DAX. But a good investment needs to be diversified and the DAX is anything but. There are only 30 companies in this index and it has an above-average exposure to China compared to broader European indices. This has come back to hurt DAX investors during this week of China Angst, when the DAX dropped more than most other equity markets in Europe.

INDEXChina sales exposure
Dax (Germany)10.2%
AEX (Holland)8.8%
SMI (Switzerland)7.5%
FTSE 100 (UK)6.4%
Stoxx Europe 600 (Europe)5.8%
Eurostoxx 50 (Eurozone)5.8%
CAC40 (France)5.3%
OMX (Sweden)4.9%
MIB (Italy)3.6%
IBEX (Spain)3.0%
OBX (Norway)0.6%


…. but what about our market outlook?

The current weakness is not a re-play of 2008 and the media reports that have drawn such comparisons are either unfamiliar with the build up of forces that imploded in 2008, or their reading of the market tea leaves is in need of refreshing. There is nothing that is happening today in the funding or credit markets that looks anything like what we saw in 2008. Whilst there are certainly imbalances and imperfections in bank balance sheets, bank capital is much greater. Regulators are also much closer to the banking systems pressure points in most parts of the world. Overall economic growth in the US and Europe remains tepid and below trend but we are far away from a recession.

Time to consider outside advice?

This is shaping up to be as bad as the 2011 correction… that no one remembers or cares about anymore. We now had 28 corrections of more than 10% since WWII in the US equity market and it won’t be the last one. If you have a plan and realistic expectations, then this week’s correction should not really affect you. If on the other hand this mini-crash made you nervous, it is maybe time to consider getting professional advice. We can show you how we are helping our clients meet their goals. Let’s talk.

Bloomberg, Factset

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