Create cash for protection

The world is not a safe place at present for financial markets. Nuclear disaster in Japan and political unrest in the middle east are unsettling financial markets with equities, commodities and currencies going all over the place. There is no place to hide and nowhere to go. The whole thing about unforeseen events is that it is unforeseen. No one can really expect an earthquake of such high magnitude as Japan faced last week. No one could have expected that events in Tunisia could lead to political unrest in the region. But these events have happened and investors are sitting on potential  large dips in portfolio values. What is the course of action to be followed now? Should one book losses and create cash for protection or should one be a cowboy and buy on dips hoping that there will be a pullback soon. 

The second question first. Cowboy behavior will only result in further damage. Buying when the market is in panic is buying blind, one does not know what one is buying into. Take for example Japanese markets. The Nikkei fell over 6% yesterday and investors who bought in the fall are facing a further 11% loss in their portfolios. Buying into panic and facing further losses will mean that one will not know when to sell. It is best not to buy into the sudden falls.

Creating cash by selling, even at a loss is a more sensible option. The cash gives protection against further losses and can be used if markets stabilize and look to trend higher. Even if the market goes up after selling at loss, one should not rue the fact. The cash must be seen as buying protection in  a volatile market.

World markets are down over 3.5% on the back of a 11% fall in the Nikkei. The Sensex is also trending down in sympathy. There can be severe pullbacks and further plunges. Investors will not be able to time the market, but they can act early. Creating cash on initial signs of panic is better than worrying about the portfolio in the last stages of panic.

The markets are not looking at a bright future in next couple of months. Middle East unrest has not died down, the states are going into elections, inflation is still a worry, corruption scams are under investigation, Eurozone debt problems very much exist, China is facing inflation and property bubbles and Japan disaster will take months to settle. Even if markets do pull back there is very less chance of it trending higher on a sustained basis.

Create cash for protection.  

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