A week ago Japan was hit with a severe earthquake and tsunami, which decimated entire towns, wiped out basic infrastructure, and split friends and families apart. Japan is considered the most prepared country in the world for earthquake readiness. However, the colossal scale of this disaster is beyond what most of us have seen in our lifetime.
Investors have been stunned not only by the catastrophic events in Japan, but also with the continuing unrest in Bahrain and Libya. It was no surprise that markets retreated heavily from last Friday through to Tuesday, with even the basic Dow stocks being hit hard.
But none of this should come as a surprise to investors – who have witnessed monumental gains in stocks from 2009 to 2010. Bullish investor sentiment, surging oil prices, the threat of global inflation, and pending interest rate increases were all in place before the Japan earthquake. Many investors and analysts already felt markets were due for a significant correction. So when the Japanese Earthquake, tsunami, and pending nuclear meltdown at the Fukushima power plant occurred, it’s no wonder stock markets tumbled. Any world event may have been the trigger. Yet markets have already begun to snap back since Wednesday. Whether that is a short-lived rally or a continuing bull market remains to be seen.
Stick with the Plan
The biggest mistake for investors is emotionally reacting to world events. There is a Buddhist saying that in times of turmoil, non-action is the most important action to take! The Canadian Capitalist wrote a most prudent article a couple of days ago, Japan Earthquake: What to do now? In this article, the Canadian Capitalist reminds us to stay the course:
“In times like these, I always go back to the basics. Do I have enough set aside to weather a rainy day? Check. Do I have a portfolio that has an appropriate risk profile that would allow me to sleep well at night? Check. Is my asset allocation more or less on target? Check.”
It really doesn’t matter if you are a dividend investor or an index investor. Having a plan to begin with, and keeping calm in times of turmoil is the key for investment success.
A Time to Buy
When markets tumble, it is often the best time to buy. For Index Investors, this week was an opportunity to top-up holdings, and dividend investors were busy purchasing their favourite picks on sale. Of course if you didn’t have the money to invest, then doing nothing and staying the course was the best action to take! This week was a reminder, that when crisis hits and fear is all around, it is often the best time to buy. This week I was reminded of the fear level that was around in markets in the beginning of 2009.
Dividend Stocks Pay
When I held mutual funds, I remembered being at the mercy of the market forces. For those of us who invest in Dividend Paying stocks, regardless of the ups and downs we always know we have that stream of dividend income. That 5% annual income from my stock portfolio is priceless when stock prices go down! This last week I was reminded that although my stock portfolio had temporarily lost value, I was still receiving monthly dividend income. While I also have a small Couch Potato portfolio, and value index investing, I primarily invest in dividend stocks.
Bonds Are a Soft Landing
Many investors and some analysts have been dead set against holding bonds with record low interest rates and surging stock markets. Yet this week was a big wake-up call for those who have been ignoring the fixed-income sections of their portfolio. The fact is when markets tumbled early this week from events in Japan, short-term bond funds and ETF’s were a refuge of safety, and actually gained value. I noticed my Claymore CLF and Bond Funds increase in value this week, while many stocks tumbled. Knowing I had a fixed-income cushion gave me peace of mind.
In fact Canadian Banks lowered their mortgage rates this week, the opposite of what many analysts and investors were expecting. If you have been ignoring the bond section of your portfolio, remember that short-term bond funds will provide you with safety in times of volatility. I wrote about the value of buying short-term bonds in a previous post.
From Nuclear Power to Natural Gas and Oil
With the impending melt-down of four nuclear reactors at the Fukushima nuclear power plant, investors pulled the trigger last Monday morning on a global sell-off of uranium producers. Established companies such as Denison Mines (DML-T) and Cameco (CCO-T), saw their share prices plummet in 2 days of selling. Even China publicly said last week, they are suspending all new construction on nuclear reactors, and holding off current uranium shipments; pending safety review of existing reactors. I wrote about this in my previous post uranium stocks on sale.
Since last week, countries have now reassessed their nuclear power programs. Abundant and cheap natural gas is looking promising as an alternative power source. Encana (ECA-T) or Claymore Natural Gas ETF (GAS-T) are two possible plays. Japan is also one of the world’s largest importers of oil. That will likely result in higher oil prices and higher stock prices for oil producers. Husky Energy (HSE-T) is both a diversified oil and natural gas producer.
Invest in Japan?
According to Wikipedia Japan is the world’s third largest economy, behind the US and China. It goes without saying any impact in the Japanese economy would affect the entire world economy to some degree. Japan is responsible for a large portion of the world’s automobile and semiconductor market. And I am sure there are many more links in the chain.
We are already seeing the ripple effects from a breakdown in Japan’s power and transportation systems. Auto makers here in North America have already begun to close plants, likely dealerships in the near future, and even Magna has closed for the week. While still too early to tell, Japanese automakers may continue to lose share value until they can recoup production. Likewise the slowdown in distribution of semiconductors will influence other Japanese companies such as Sony and other household electronics. However keep in mind these are temporary setbacks, and Japanese companies will be able to rebuild quickly.
The Japanese Ambassador was interviewd on BNN (Business News Network) this week. He made a good point in that the area affected by the Earthquake and tsunami is not an industrial area, but a rural and primarily fishing economy. That means the core industrial and manufacturing complex in Japan (excluding power plants) may not be so directly impacted, as first thought.
This makes investing in Japan for those who are brave enough to do so, a possible value play. The easiest way to invest in Japan is through a Japanese ETF or Index Fund. If you have a TD Waterhouse account, or TD mutual funds account, you can invest in the TD Japanese Index Fund – e series, with an MER of only 0.48%. Or you can invest in the TD Japanese Index Fund – s series, which has an EMR of 0.98%. Avoid mutual funds that invest in Japanese stocks, because you will be paying a much higher MER that will impact your overall return.
Donate for the Japan Earthquake
As a final reminder, please remember the crisis in Japan is a human tragedy. Take this time to ponder what you would do in a similar situation, losing your home and family. How would you cope? Who would you turn to for support? The Red Cross, as with other international relief organizations, is often the first to arrive on scene with local emergency personnel. The Red Cross offers basic life saving supplies such as food and water, shelter, as well as support and assistance to those in crisis.
If you haven’t yet made a donation to assist those in Japan, please consider making a donation to the Canadian Red Cross: