China is Down, Smart Investors Have Patience

It looks like today (June 24, 2013) is going to be a another tough day for Chinese stocks. The US market hasn’t opened yet, but the China index is down 5.3%.

If anything, this is a strong reminder that nothing goes straight up forever. At the end of 2009 it was unfathomable to most investors that China and other emerging markets could under-perform the US. Now China has become the locus of global economic concern.

If you are starting to fret over your emerging markets exposure, remember that something like this was inevitable at some point. We had no idea when a pullback like this would happen in emerging markets, but we shouldn’t be overly surprised when it does happen.

Even the best centuries have panics

The 1900s are often called the “American Century.” In retrospect, we all would have wanted to be invested in US stocks at the beginning of the 20th century. But an investor in US stocks would have had to go through repeated periods of high volatility, multiple banking crises (not to mention two world wars) and some sharp losses on the way to the long term prize of great returns over the century.

No economy in history has been able to have rosy returns on a consistent basis decade after decade without going through some frightening periods on the way to long term prosperity. The US wasn’t finished in the 1930s, nor was it finished in 2010. China isn’t finished now.

Multi-generational patience

That being said, China could reverse and start going back up tomorrow or it could take 20 years. This is where a long term view of generational wealth comes in. A long term investor with a multi-generational mindset can be patient. Imagine an wealthy family in Britain in 1930, watching the Great Depression take hold in the US and the rest of the world. A patient strategy of holding on to their US stocks would have clearly been the smartest move. The same applies now to a global portfolio (that includes Chinese stocks) for a multi-generational investor today.

Photo by epSos. de