A Risk That No Longer Exists

Here's a thin, thin silver lining in the recent market turmoil: If you've ever thought your portfolio was imbalanced, with too much exposure to one area and no exposure to another, now is a risk-free time to fix it.

There are so many risks facing investors these days as credit markets, the oxygen of the global financial system, have sludged up. I do not know when, but I guarantee that this will change.

If you think about it, many times our portfolios come to resemble whatever was cheap at the time we had cash. If you bought a lot of Chinese stocks in 2004, it probably figures that your portfolio is heavily weighted toward China today. That, of course, has caused you some pain lately. And if you had lots of cash in 2006, it's possible that you ended up with lots of asset companies, like Hidden Gems recommendation Vail Resorts (NYSE: MTN  ) , hot tech stocks such as Research In Motion (Nasdaq: RIMM  ) and Apple (Nasdaq: AAPL  ) , or booming commodity names like Valero (NYSE: VLO  ) and Petrobras (NYSE: PBR  ) .

The global markets have been equal-opportunity destroyers. If you think the market in the United States is tough, keep in mind that this year has been brutal overseas. The Dow Jones World (ex-U.S.) market is down 56% in the past 52 weeks, with only the stock markets in Sri Lanka, New Zealand, and Venezuela having turned in performances better than -35%. Take a picture of that, because you'll never see it again.

As I was talking about this with my Global Gains colleague Tim Hanson, he noted that last year at this time he did a simple inventory of his portfolio and recognized that it was 25% in financials, simply because they had happened to be cheap at the time he was adding the majority of his funds.

So he did something that I think is pretty smart -- and it turned out to have helped him avoid substantially more pain: He hit the reset button.

Sell everything?
It is the nature of portfolios that they become unbalanced after a while. One doesn't have to be an adherent to the efficient-market hypothesis to recognize that a portfolio that consists of 19 tech companies plus Pfizer (NYSE: PFE  ) is not diverse. This matters, because when something affects the tech sector, all of the companies will be hit to one degree or another.

Which is why, if your portfolio is unbalanced, now is a perfect time to start anew. It doesn't mean that we sell it all and run away. It means that now that fear has grabbed hold of the market, it's a good time to build your portfolio in a way that it ought to be built.

Go global?
Mohamed el-Arian, CEO of PIMCO, now estimates that the average investor should have 65% of his or her portfolio in non-U.S. stocks. Warren Buffett, chairman of Berkshire Hathaway (NYSE: BRK-A  ) , suggests that investors buy American. I think that at current prices, an investor who chooses to do either is going to be making decisions today that will quite simply define his or her investing success over the next 20 years. This is investing Nirvana. The tide has gone out on prices for everyone.

Take a look at your portfolio. Are there things you own that you, after honest reflection, have no idea why you bought them? It's time to say goodbye to them. Yes, yes, it hurts to sell something that may be down so far. But I have good news.

Everything is down. For the first time in decades, you have a penalty-free opportunity to structure your portfolio as you want it. Is your portfolio too heavily leveraged toward energy stocks or commodities, with no exposure to China? Sell, and buy.

Most Americans have too little exposure to foreign securities. There's just something nice in a time of fear about having your money in companies that are closer to home. But since 2002, emerging markets -- especially China, Brazil, and India -- have been on a tear. My team and I traveled to China and India in 2007 and found some exciting ideas, such as New Oriental Education & Technology and HDFC Bank, but thought that the markets were generally overpriced. Some things we liked, but not a bunch. Oh, but we're finding opportunities now, everywhere: While S&P 500 companies trade for an average 14 times earnings and our economy grows by 2%, Indian and Chinese stocks trade for just 12 times earnings as their booming economies continue to expand by 7% and 9%.

We don't know when the markets are going to turn around. We do know that they will. There is too much enterprise and industry in the world, and the opportunities for growth and positive economic development are too great to allow this fear to hold sway forever.

So if you're looking at your portfolio and you see a couple of strangers, it's a great time to say goodbye. And if you're looking to expand your investing horizons, our international stock service, Global Gains, is here to help. You can click here to see the 10 best international opportunities my team and I have identified, free for 30 days.

Bill Mann owns a samovar, a shuriken, and a matryoshka. He also owns shares in Berkshire Hathaway. New Oriental and HDFC Bank are Global Gains recommendations. Vail Resorts is a Motley Fool Hidden Gems recommendation. Pfizer is an Income Investor and Inside Value pick. Berkshire is a Stock Advisor and Inside Value pick. Petrobras is an Income Investor pick. Apple is also a Stock Advisor selection. The Motley Fool owns shares of Pfizer and Berkshire and is investors writing for investors.


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  • Report this Comment On October 28, 2008, at 6:35 PM, sidinsd wrote:

    This article overlooks something fundamental about balancing your portfolio. The author claims it is a "risk-free" time to do it because everything is down. But, if you sell the dogs in your portfolio now to try to balance it, you turn a paper loss into a real loss and you probably won't get enough return from those investments to properly balance your portfolio. The only way to do that is to hold on to everything you have and inject some new capital from some outside source to buy the necessary stocks to balance your portfolio.

  • Report this Comment On October 28, 2008, at 11:50 PM, OctoberAmy wrote:

    Paper loss...real loss..we fool ourselves if we think there's any difference. The question is, if you had that money in cash in your hand, would you put it in the "dog" or in the "good investment alternative". I learned that lesson the hard way when I hung onto Lucent from $80-something all the way down to $14 just because I didn't want to turn the "paper loss" into a "real loss". It never came back. The Lost Opportunity was the real loss.

  • Report this Comment On October 29, 2008, at 12:45 AM, NEWSMONKEY wrote:

    Sell this rally if you know what is good for you. The reasons are simple and relatively straight forward. Firstly, nothing has changed if anything things have gotten much much worse. The dominoes are falling one by one and leverage is getting wrung out everywhere. Consider Russia which had about 500 billion in reserves and a dollar squeeze of over 300 billion due to maturing dollar denominated debt. Russia is an outlaw in the financial markets consider this action they took today: Court Freezes Altimo's Stake in Vimpelcom http://online.wsj.com/article/SB122516354059275209.html?mod=...

    Further consider these articles today concerning the european nations and England

    Europe Faces `Huge Threat' as Emerging Markets Slide http://www.bloomberg.com/apps/news?pid=20601068&sid=aahr... or this article http://blogs.wsj.com/economics/2008/10/24/emerging-market-as... or this one which puts the The scale of euro zone loans at about $2.5 trillion in foreign-currency loans to emerging markets. http://news.bbc.co.uk/2/hi/business/7693020.stm

    European banks have lent heavily to crisis-stricken eastern European countries such as Ukraine, Hungary and Belarus. Their exposure which came to a head today makes the US sub prime mess look like child's play given there relative GDP size the problem is more than 5 times that of the US problems. Add to that Iceland, Turkey, Dubai, New Zealand, Argentina and Brazil thrown in just for good measure. These are problems only just coming to light today or in recent weeks. The world is an absolute mess and they are starting to fall like dominoes. Unfortunately once a massive deleveraging like this begins it won't stop any time soon.

    If you are kicking yourself for having not sold sooner don't miss this gift. The rally may last a day or a week but be certain it wont last. This is a prelude to an utter collapse. Consider this article by Nouriel Roubini, Who is he? He was the guy calling for this disaster over two years ago. The New York University professor who predicted the financial crisis in 2006 Bloomberg (October 27, 2008): Roubini Sees `Significant Downside Risk' for Equities http://www.rgemonitor.com/blog/roubini/ If you are thinking about buying now you should spend some time on his blog and I guarantee you won't.

    The monkeys on CNBC (my brothers) call for a bottom being made about 100 times a day. Before you commit the last of your capital trying to buy the bottom ask yourself this question. Who is dumber them for losing the first 35% or me for losing the next 35% because I thought I was smart? So what is the answer? Are you really that smart? Are you really that well informed? Or do you make most of your decisions based on what you see on CNBC?

  • Report this Comment On October 29, 2008, at 1:58 AM, dividendgrowth wrote:

    Most individual investors have no business in picking individual stocks, because most stocks are scams. Of course, there are always a couple of gems hidden among the huge pile of ****, but the odds for an amateur investor to dig them out are probably not much higher than state lottery.

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