This week the Argentine stock market, known as the S&P Merval Index, lost over 48% in dollar terms. We are not talking about a single stock, we are talking about a complete stock market crash. To make matters worse, the Argentine peso lost 15% in one day, which is a huge movement in the currency markets.
What caused this? The same thing that causes just about every big move in any market index – something unexpected and surprising happened. In Argentina’s case, it was a surprise political outcome.
And That’s Why You Diversify…
You can make a case that no one should be surprised since Argentina has a history of market crashes, corrupt politicians and currency issues. But they have also been making changes, and the market was up over 30% YTD before the crash, despite the peso getting devalued on an almost daily basis.
Many news agencies mentioned how Argentina was recently added to the MSCI Emerging Market Index to insinuate that performances of those indexes would also get hit because of Argentina’s market crash. But that wasn’t the case. The MSCI Emerging Market Index lost less than 2% yesterday (US markets were off more than 1%). At the time of this writing, the the MSCI Emerging Market Index has already recovered all its losses yesterday, plus some.
Whenever we hold any individual stock, sector or country, we increase our risk. Things may go well, or they may not. But whenever things go poorly, it is almost always triggered by something unexpected, something surprising. And as investors, we may not be able to predict what surprise will occur, we can certainly predict we will be surprised by something.
Value or Value Trap?
When an investment loses value, it is very difficult to discern whether it represents a value or a value trap. Even with Argentina today. Sure, things aren’t going well. But was the sell-off over done? Is this a great time to invest in Argentina? Or is this simply one of more crashes to come? We simply don’t know. Hindsight is 20/20, and with every investment we can play the “woulda, shoulda, coulda” game. But since we invest in the future, we need to critically consider our decisions.
A friend lived in Argentina from 1994-1996. At the time, the Argentine peso was pegged to the US dollar. Eighteen months ago she visited Argentina, where the exchange rate was roughly 14 ARS to 1 USD. She was excited how far her money went. She remembers thinking at the time, “I wonder if this is a good time to invest in pesos, it has fallen so far.” My friend was likely anchoring to her initial experience in Argentina of being pegged to the dollar, and found this relative depreciation in the peso as a value, perhaps an attractive investment opportunity. Fortunately she didn’t act on the thought because currency is not her thing and she listened to me! And thank goodness she didn’t.
The exchange rate is now 56 ARS to 1 USD. So, it was a huge value trap. Now, is 56 a good value? Has the currency fallen too far, too fast? I don’t expect it to get back to parity with the USD, but what if it just got back to 30 to 1 (which is where it was last year at this time)? That would represent a significant gain. The reality is no one knows. It could also go to 100 to 1.
Rely On Your Plan
And that is why every investor should have a well-designed, written financial plan. We are very good at knowing things in general, but we are horrible at predicting specifics. Every financial decision should be based upon your plan, and not feelings, instincts or hunches. If you want to speculate on a long shot, do it with money you could completely lose – because you might.
But for your serious money, stick to a plan. It may be fun to ask yourself questions about investing in this or that, but don’t deviate from what you are familiar with. Dreaming about making money and hitting a home run is fun, but we need to balance that out with the realities that there are way more strikeouts than home runs. You just don’t hear as much about them.
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