Should you even be in the market?
BHP has not performed well in recent years. In retrospect, commodities should have been the sector to avoid for investors. But that is in retrospect. Who thought the energy deflation would become this bad? The answer is very few people.
The story is consistent for BHP shares, the Aussie dollar and commodity prices in general. But absolutely nothing has changed. Commodities are going through a deep cyclical bottoming process. A lot of it has to do with oversupply.
Should you buy BHP shares? If you are a long term investor, YES. For long term investors, buying at cyclical lows is a winning strategy. The question is ‘are you really a long term investor?’ Will you be willing to hold onto a stock for years and years only to see it gain very slowly?
If you are not, don’t buy BHP shares.
I wrote to New Frontier Investors readers about whether they should remain in Aussie stocks or not, given the current bear market.
By the end of 2015, the risk in the market was edging closer to a level where investors may as well just get out of the market altogether.
Yes, it’s certainly a way to go. But today, I’ll tell you that my strategy is simply to reduce exposure relative to risk.
What do I mean by that?
I mean, when the risk to your portfolio gets to a high enough level, the best thing to do is to reduce your exposure to the market without completely stopping all trades.
The reason is simple. If you stop your trades because your risk has reached an unacceptable level, when would you get back into the market again?
You probably can give a very quick answer to that: I will get back in when things have calmed down and prices are picking up again.
While that is a valid strategy to calm the nerves, it’s not a clearly-defined enough.
The rebounds in a market are usually as big as the falls. This means if you get out after you were caught in the sell-off, you would miss the rebound and the chance to redeem your losses.
So what you can do is start to limit your exposure after your loss reaches a certain point. That way, you limit the potential of further losses, but won’t completely lose the potential rebound.
And always remember this philosophy about the market: the closer you are to the bottom, the higher the chance for a rebound.
How do you know if you are close to a bottom? Just look at historical data.
For China, we are close to the lower bound. For the Aussie market, losses are by no means close to the lows of the Global Financial Crisis. But it is somewhat close to the other stock market collapses in the last 30 years. This means that, unless you are expecting another GFC, you are probably wise to limit your exposure but expect a possible rebound.
Emerging Market Analyst, New Frontier Investor