Likely market correction

China set up 3 yuan hubs in the top financial countries namely Singapore, Hong Kong and London as it reduces its US treasuries holdings. This happened chronologically after Obama administration warned the Congress of a possible US default on its debts in October, China reduced its holdings by $11.2 billion to $1.268 trillion in August.

Source: http://www.straitstimes.com/the-big-story/asia-report/china/story/more-offshore-yuan-hubs-no-fears-singapore-20131024

Source: http://www.globaltimes.cn/content/819847.shtml#.UmzZp5SkzaE

NYSE hit a 5 year high despite risks of a US default on debts and no signs of tapering of US monthly bond purchase. 

Source: Bloomberg

US markets are in their 5 year high and with the debts problem still unsolved. The risks of a correction are present but still not visible in the short term. 

Singapore markets might be affected by the correction if investors panic sell stocks.

Protecting your portfolio

Investments can rip high returns, and may also rip high losses. I started investing with a mindset of buying low and selling high, which sometimes can lead to high losses in the stock market.

The thought of buying low and selling high often traps investors, including myself into a value trap. A value trap means that the stock can be on a downtrend but the investor keeps holding the stock thinking that it will go up eventually after a crisis. But if the stock do not go up, the investor will risk better returns elsewhere because the current stock bought at an overvalued price did not get sold away.

Do not fall into a value trap while preparing for a crisis

While thinking of what to sell in your portfolio to prepare for a crisis, what have gone down in value cannot be ignored. Instead of thinking of the losses due to the sale, think of how much lower the stock will go in the event of a crisis. By changing the way you think, you can avoid more losses than what you have already incurred.

Protecting your portfolio

By having a diversified portfolio of stocks, you mitigate your risk of a single sector downfall and keeps your portfolio balanced. For example, in a diversified portfolio, you may see stocks spreading across a few sectors like 'services, finance, transport'. A financial crisis would likely bring the prices of stocks in the finance sector on a downtrend while the services and transport sectors helps to keep the portfolio buoyant.

Making prudent decisions

It is very important to make prudent decisions in the equities market because as what Warren Buffett said, "If you buy things you don't need, soon you will have to sell things you need."

This is what happen when 3 stocks, namely Blumont, Liongold and Asiaons plunged up to 80% after SGX suspended trading on them. They are highly speculative stocks and anyone who bought it at a high price will soon realised that they are holding on to huge paper losses.

Even when the prices have dropped tremendously, people still think that the stocks are undervalued. and there are no indicators or rather unknown indicators of its future growth prospects.

Although the temptations of a 'buy low sell high' mentality is strong, i would like to remind myself to be prudent in investing and of what Warren Buffett said.

Correction risks and knowing where they are

Nasdaq Composite Index at 5 year Highs

Source: Bloomberg

New York Composite also at 5 year high

Source: Bloomberg

STI not belonging to a 5 year high

Source: Bloomberg

Conclusion

The US market is likely to correct as it has gone up to a 5 year high. Stocks had been rallying at a steady pace even with the government shut down. Investors are still optimistic that the continuation of QE will bring about better profits for businesses and are not worried about the impact of the government shutdown.

 STI still have correction risks, but the government are still running without major problems. The economy is growing, although at a very slow pace.

Taking the story of the race between a fast but complacent rabbit losing to a small but steady turtle can be used to describe how long term investing can win the race by placing assets in a slower growing market and avoid the risks of complacency which might lead to a major stocks correction.