Yoshikami: North Korea Attacks—Calculating Your Risks
North Korea is making investors lives difficult today (not to mention negatively impacting the people of South Korea). I appeared yesterdaywith Maria Bartiromo on CNBC Asia Squawk Box; she is in Singapore hosting the ABLA awards event held each year during Thanksgiving week.
During my two hour guest host appearance (which was done remotely from San Francisco) we discussed emerging market opportunities and other investment strategies.
Little did we know at the time thatNorth Korea was planning an attackthat would reverberate throughout the world. Alarming to say the least. Our thoughts are with the victims of this attack.
Let's all hope that tensions ease sooner rather than later.
I'm in London today and you can feel the uncertainty as flat panel TVs are all tuned to networks watching for news on Korea and the resulting damage to the markets.
It's been quite a week for the United Kingdom as geo-political tensions rise in Asia and Ireland struggles under massive debt.
Yes, we are global investment community and news far and wide impacts markets around the world.
Investing in emerging markets is a strategy that makes sense if one is seeking to grow assets at a higher rate of return compared to struggling economy burdened by high deficits, high unemployment, and other structural problems. I am confident that over the next 10 years emerging market returns will significantly outpace more established economy equities. But there is a cost for bigger gains.
The news from Korea today highlights that emerging markets do have risks that one needs to be aware of including tensions between neighbor countries, political instability, and currency challenges. The road to higher returns is paved with higher risk to be sure. Higher returns comes with higher volatility.
So as an investor, what are you to do when these situations arise? When news breaks that impacts markets you are wise to ask yourself the following questions:
- Is the news of the day lasting in it's impact and will it structurally change growth prospects of a given investment?
- Is the market reaction appropriate across all regions and is there a contagion overreaction that provides an investment opportunity?
- Do current events provide the opportunity to reallocate resources across equity classes, either to avoid significant downside risk or to take advantage of any potential overreaction?
The world of investing is paved with opportunities for success but also pitfalls that must be assessed on an ongoing basis. Too often investors fall in love with potential returns and discount the risk. It happened with the dot com bubble in 2000 and the housing market for the last 5 years.
Its a simple fact; there is no free ride and investors must recognize this fact when allocating capital.
Denial of risk is a major mistake individual and institutional investors make and the consequences of failing to be cautious can be severe.
The news from Korea highlights that investors must recognize that geo-political tensions are a permanent part of the investment landscape. Other risks exist as well and a healthy dose of fear is merited when implementing a portfolio strategy. Optimism and fear; both have their place as you invest.
The potential for surprise needs to be factored into any investment decision-making process. Failure to heed this advice can have lasting and costly effects on portfolio strategy. the news from Korea today give us yet another lesson that in investing, you just never know what the new day might bring. Invest based on this reality.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.