This brief two-part summary covers two areas of interest: China and investor behavior. The first is China, which is on every investor’s mind, and explains how to invest there while avoiding most of the problems you’re hearing about. The second is a personal essay on having a successful investing mindset from a Hollywood executive producer, which, in my opinion, is more important. I hope you enjoy this update.
Invested in China?
Many investors are concerned about the recent events in China and what this means for them in the future. Well-allocated portfolios should be invested in China not as a specific targeted investment, but as a broad allocation within the asset class known as emerging markets.
A sound investment portfolio strategy is not invested in the mainland China retail or “A-share” markets that were and continue to be significantly affected by recent events there. How so?
Dimensional Fund Advisors (DFA), had the foresight to have not yet approved the A-share market for inclusion into its emerging markets funds. These are the stocks in China you’ve been hearing all about. These A-share stocks, trade on the Shanghai and Shenzen exchanges as opposed to the Hong Kong Exchange which DFA utilizes for China exposure. From the peak on June 12 to July 8, an estimated 1,300 A-share companies on the Shanghai and Shenzen exchanges requested their shares be suspended from trading, representing approximately 50% of all stocks trading on those two exchanges. By contrast, there was not an unusual number of suspended trading companies on the Hong Kong exchange during that same period. This is an enlightening and comforting statistic and helps demonstrate the importance of risk management processes for investors who are concerned about safety.
For a more in-depth explanation of these points, click here.
Another reason the events in China haven’t had a significantly adverse effect on a sound investment strategy is due to the idea that you should typically allocate only about 10% out of a stock allocation to emerging markets. One of the funds that can be used for emerging markets exposure is DFA Emerging Markets Core Equity Portfolio(1) [DFCEX], which as of June had only a 16.74% allocation to China; the remaining dollars in the fund are allocated across 14 other countries. To put this into perspective, this would represent only a $16,740 exposure to China in a $1 million portfolio.
We do things differently for a reason, basing our strategies on academics and a prudent disciplined investment process. The point is, headlines are always reporting events that may not be relevant for the intelligent investor.
The Big Bang Theory
Have you heard of the TV show, “The Big Bang Theory”? I hadn’t until last week, when I was visiting my mom and picked up a People magazine lying on her desk. Do I really read about what celebrities are up to? I know that thought came to mind. Admittedly, People was one of the most coveted magazines in our fighter pilot ready room before the days of the Internet on U.S. naval vessels. The mail was golden.
But I digress. David Goetsch, the co-executive producer of “The Big Bang Theory,” is invested in DFA funds. I’ve provided some gems from his essay, Taking Stock. In summary: “Dave has adopted a long-term view of investing, which he found transformational during the recent market volatility. He describes his experience in the essay. His perspective is a testament to the importance of having a strong philosophy and underscores the value an advisor can play in educating clients and preparing them for uncertainty.”
“I feel completely different today. I understand that it’s not all or nothing. Academics have shown that, over the long haul, the stock market is the best place to get a long-term return. Research has also shown that I can’t time the market or pick stock winners better than randomness. So I don’t.”
“I’m a long-term investor in the stock market. I don’t care about the ups and the downs of a certain day because my retirement is over 20 years away.”
‘“The best thing about all of this is I managed to get off the emotional rollercoaster that many investors are trapped on—the same one on which I used to live.”
My goal is to get my clients off that emotional rollercoaster David was on. Many will never get off completely, but those who understand the value of their advisor will experience far fewer stomach-churning ups and downs.
To further discuss these issues or anything else, feel free to schedule some time with me here.
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