Today I have been researching the events surrounding the US credit downgrading from AAA to AA-plus which happened in August, and the impact it has had and will have on the New Zealand economy.
New Zealand's credit rating was downgraded just last week, but I think that will get a seperate post.
What I find interesting is not the downgrading itself, but the events that happened the week immediately after the downgrading. Everybody panicked.
Well, not everybody, but a number of investors got worried about their investment portfolio, especially the riskier elements. They began to sell their shares in these riskier investments which led to a decrease in the price of these shares. This caused more investors with investments in these shares to panic, and sell off their shares. And so on...
The result of a large number of investors suddenly deciding to sell their 'riskier' shares was a market crash. This market crash lasted about a week, before some smart investors realized that the shares in some investment options were hugely undervalued and began buying them. The market price then rose until it reached something nearer to the true value of those shares.
So after those two weeks of trading we have investors who panicked and ended up selling investments at a price lower than they were worth, thus losing value on their investment portfolio. Others made smart (but risky) decisions and bought shares at bargain prices, thus increasing the value of their portfolio.
The moral of the story is, don't panic. Also, be careful how you spread your risk.
I am no investment expert, I do not yet have that sort of money, but from my background in probability I've heard it is best to invest most of your money in safe low-risk investments that will give a lower but steady return, and only invest a small amount, an amount you won't mind losing, in high-risk/high-return investments. Think of it as a smart type of lottery ticket. Then you just have to ride the roller-coaster which is the ups and downs of the financial markets.
It is always dangerous to try to jump on or off a moving roller-coaster.
Dew
