Ahhhh…why is my portfolio tanking?
If this was one of the many thoughts running through your mind yesterday, then you were not alone. The S&P 500 dropped a whopping 1.83% and pulled most of your fellow investors’ portfolios with it into the red.
So why did this happen, and what can you do about it?
Thank your fellow Italian voters for this one. The Italian election did not turn out the way that the rest of Europe expected. The initial news of the Reformist party’s victory caused a gain in the European markets such as FTSE 100 (UK) 0.31%, DAX (Germany) 1.45%, CAC 40 (France) 0.41%.
Initially it looked like the reformist party was going to win across the board, but the winning party did not win a majority in the Senate, which the new Prime Minister needed to pass the new budgetary legislation that the newly elected reformist party in Italy will want to pass.
When the US markets opened, the news of the loss of the Senate majority arrived, and with it, a lot of uncertainty—and as we all know, investors hate uncertainty.
The markets responded to this news with the S&P 500 dropping 1.83%, the biggest selloff in 2013 to date. The DOW dropped 216 points to close at 13,784.17.
It’s little bit like a replay of the fiscal cliff problem in the US that was fundamentally caused by the inefficiencies and differences in our bipartisan political system.
In Italy, the election results have raised a lot of uncertainty surrounding the budget reforms for Italy. How Italy sets their budget for 2013 heavily impacts the rest of world, because they are the world’s 8th largest economy with heavy debt obligations (to the tune of €2 Trillion Euros) owed to the rest of the European Monetary Union (EMU).
So you see, what happens in Italy does not stay in Italy.
What can you do about it?
For a value investor like myself, this is actually an opportunity. When the markets go down, it often scares away the retail investors as they see their current holdings go down in value.
What they don’t see is this: the price for them to now get a bigger stake in a particular company they may have on their watchlist is now relatively cheaper than yesterday! This will benefit them in the long run as long as the company they are interested in is growing.
Another way of thinking of it is that the S&P 500 is being offered at almost a 2% discount today.
You should always have a cash buffer of 5%-20% of your portfolio in order to act on situations like this.
Tip for Advanced Investors
Another and riskier alternative to buying growth stocks when they experience a dip like this is to actually invest in the uncertainty. This is for more experienced investors who are able to invest in Exchange Traded Notes on the The Chicago Board Options Exchange Volatility Index (VIX) or the “Fear Index” by which it’s often referred.