My Personal Finance Journey

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Shanghai Sneezes and The World Catches Cold

Contributed by mm | February 27, 2007 10:52 PM PST

The Shanghai Stock Exchange had never made Wall Street Journal headlines, until yesterday, where a 9% sell-off prompted a butterfly effect on all major stock exchanges across the world:

Yesterday's plunge in stock prices around the world, including the steepest percentage decline in the Dow Jones Industrial Average in nearly four years, signals that investors may finally be re-evaluating their insatiable appetite for risky investments.

The catalyst was Tuesday's nearly 9% fall in stock prices in Shanghai, one of the hottest and most volatile markets in the world. That helped send U.S. stocks on a roller coaster that ended with the DJIA down 416.02 points, or 3.3%, to 12216.24.

My aggressive portfolio isn't immune from the market slide. All in all, my portfolio tumbled $24,000 in one day (including $12,000 loss in employee stock option account and another $12,000 in mutual fund and stock holdings), making it the worst day in my investment endeavor so far.

The sudden plunge in Shanghai is well deserved. The A-share index here almost doubled in the past year, and the average market P/E is at a hilarious 35 before the sell-off. Failing to justify the price of the market by its merits in the last several months, local analysts have been referring to continued inflow of hot money (either from people mortgaging their apartments or foreign investors smuggling dollars into the country) as reasons that the market will continue rising.

But the U.S. market? While the current bull run has extended too long without a correction, the market average P/E is still in line with historic average. It is certainly not cheap (and I couldn't find many buying opportunities even after yesterday's sell-off), but it is certainly not excessively expensive too. I'm certainly disheartened by the single-day drastic loss, but I still have plenty of cash positions, and if price is right, I'm willing to commit more funds to right stocks. Am I too optimistic?

P.S. Shanghai Stock Exchange is recovering from the Black Tuesday and closed today almost 4% higher that yesterday's close.

This Post Has Received 3 Comments. Share Your Opinions Too.


MoneyMan Commented on February 28, 2007

When we look back on the market's performance 10 years from now, I am quite certain that yesterday's decline will hardly even register as a big event. Stocks closed higher in the US today, and they will continue to fluctuate in the future. For investors who stick to their long term plans, a day like yesterday should mean very little.

a $24,000 loss though... ouch! But that is also a result of your substantial portfolio so I'm not feeling too sorry for you, especially since I'm sure you will earn it back + more over time.


joewatch Commented on March 1, 2007

One thing to take away from market drops such as Tuesday's is how value funds outperform growth funds in the long-term. Value funds lose a lot less in market drops than growth funds, and that makes all the difference.


CPA1298 Commented on March 1, 2007

I wonder how the hedge funds did. Hopefully, several go out of business. I read today that the hedge fund 'benchmark' return just under 7% last year. I hope the people paying their managers on the 2%/20% program enjoyed having the S&P outperform them by about 300%.


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