Straight Story: Market madness

Marketplace Staff Mar 2, 2007

TESS VIGELAND:
It’s time once again for our economics editor Chris Farrell to tell us what’s smart, what’s stupid and what is the straight story. And Chris, awfully big news this week on the stock markets. A nine percent drop in China on Tuesday, which spurred a sell off on U.S. markets. It sent the Dow down 416 points. The S&P took a dive as well. Things recovered a bit on Wednesday, but still pretty scary stuff while it was happening. What’s an individual investor to do at this point?

CHRIS FARRELL:
I have two points or two reactions. The first reaction, for every individual investor out there, including the ones that email me or call me, when the market was plunging, don’t panic, just sit back. You’re gonna get an opportunity to shift things around if that’s what you wanna do. Pay attention to what’s going on, but don’t panic. Now my next thing, and it’s a little less straightforward Tess, but it’s even more important. You know, in this show, we talk about risk all the time. When you invest, you take on a certain amount of risk. As markets go higher and higher, month after month–and not just here in the U.S., but overseas…

VIGELAND:
You get kind of comfortable with how things are going.

FARRELL:
You get really comfortable with risk and you say, you know, I got a-hey, I can tolerate a lot of risks. These are the moments that concentrate the mind. That risk is a four-letter word. So here’s the straight story. Market free falls, like the one we just had, can be beneficial. They force you to take a good, hard look at your portfolio and really assess whether you’re comfortable with the risk you’ve taken.

VIGELAND:
Well, before I ask you kind of how we go through that thought process of deciding what to do with our investments at this point, give us some context for what happened this week.

FARRELL:
I think part of the environment, and we’ve talked about this in the past Tess. You know, there’s so much money flowing around the world going into all kinds of investments and the hedge funds and the private equity funds. And there has been a search for higher returns. And so, when you look at the best performing stock markets, you know, past 20 months, the Chinese stock market’s done really well, the Romanian stock market. I mean, money has been seeking into the far corners of the global economy looking for higher returns. And there’s been those muttering that people are taking on too much risk, and we don’t really know. Why is it that this week, everybody woke up…

VIGELAND:
And said, oh, shoot.

FARRELL:
Yeah, today is the day. I mean, maybe it’s because former Fed chairman Alan Greenspan made some mutterings in Hong Kong about the possibility of a U.S. recession, and by the way, the man has no power.

VIGELAND:
Oh, but, contrary, my friend, apparently he still does have quite a bit of power.

FARRELL:
Absolutely. But you know, whether that was the trigger, whether it was another one of the sub prime mortgage lenders getting into trouble. You had Freddie Mac tightening its credit. I mean, clearly there’s credit tightening going on here. But the key background is a systematic underestimation of risk. And I think that the epicenter of risk in the global economy is not the U.S. sub prime housing market, it’s China.

VIGELAND:
So how do you assess risk within your own portfolio then? We’ve been hearing a lot that, well, you know, emerging markets is the hot place to be, but this would really scare a lot of people, I would think, in the future.

FARRELL:
It would scare a lot of people. You know, one of my favorite stories was JP Morgan, one of the richest men in the world, great Wall Street banker and he’s walking down the street, and this guy keeps tagging along and he’s exposed his portfolio, the stocks, he’s been losing money and he’s really nervous and he says, you know, Mr. Morgan, what should I do? And Morgan turns to him and says, sell down to the sleeping point.

VIGELAND:
The sleeping point?

FARRELL:
If you can’t sleep because you’re exposed to China and India, let’s take a little bit of a step back, we still wanna be exposed to the international exposed to the economy but there’s all kinds of ways that we can do it. But did you get in that mutual fund-because they’re invested in Brazil and India and China and Russia, and all of a sudden you find out that I liked it when it was going up, but I really don’t like it when it’s going down. Hey, guess what, wrong investment.

VIGELAND:
And that’s gonna happen no matter what your investment is, right?

FARRELL:
Well, you’re gonna have regrets but that’s okay. I mean, we all have-make mistakes. But for example, I didn’t make any changes in my portfolio when the bubble burst in 2000, I had a well diversified portfolio.

VIGELAND:
Did you do anything this week?

FARRELL:
No, absolutely not. And I won’t do anything. And I’m exposed, heavily exposed internationally. I mean, if I’m gonna have to draw in it the next year or two, for example, then I’d be sitting back and saying, boy, I need to make some adjustments in my portfolio. But I’m gonna be riding it for, hopefully, a very long period of time. And I just look on this as part of the fluctuations in the market.

VIGELAND:
All right. Our man Chris Farrell with some terrific advice about what to do when the rest of the world panics. Thanks so much, Chris.

FARRELL:
Thanks a lot, Tess.

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