Investing vs. Speculating: Lessons from the Japanese Yen Carry Trade Unwind
The markets have been in a volatile state recently, and stock selloffs have been recorded in various parts of the globe. Many are asking, “What’s going on?”
One of the causes of this disorder is something called the Japanese yen carry trade, which you might never have heard of.
What Is the Japanese Yen Carry Trade?
The Japanese yen carry trade refers to investing in high-return assets using money borrowed in Japan because interest rates in the country are very low. This trade is favorable during stable market conditions, however, lately, the Japanese central bank has decided to increase the interest rates unpredictably. This has led to lots of investors to open more trades with the intention of closing them shortly, hence increasing the rate of trading and thus instability in the market.
The Rise and its Effects on the Global Economy
This tightening of the Japanese yen carry trade has brought into focus a “risk-off” strategy in world markets. People are withdrawing their money from stock investments, bonds, and property, and therefore the prices are falling drastically. Such downtrends are even more pronounced and frequent when investors employ borrowed funds in a bid to close their positions.
Market Volatility: What You Should Do
It is important that we do not let our emotions get the better of us, and especially not look at the stock exchanges and start panic selling. Please be sure to remember that a stock is essentially an ownership certificate in a business, not a 12-month speculation. If the basic characteristics of the firms that you hold in your portfolio are still appealing, then this does not mean that you must sell off your shares because the markets are weak. Selling during a dip means that you are sealing your loss, which is not suitable for the long-term investment plan.
Take Apple, for example. In the recent past, Buffett sold off some of his company’s shares in Apple, consequently affecting the shares’ performance. As an investor, if you invested in the firm at a higher value, what you would desire is to sell the Apple shares and minimize your losses. But if nothing about Apple’s business has changed that would allow investors to conclude it is undervalued, why sell? To sell now is to incur a loss that could have been averted if one had been a little patient.
Investing vs. Speculating
This situation clearly shows or illustrates the difference between investing and speculating. Investing therefore means acquiring sound businesses with the anticipation that they will grow, and the longer the period, the better the returns. Guzzling, however, pertains to the act of making predictions on short-term movements of the market, and this is dangerous a lot of the time, especially when you have taken a loan to speculate. If you are selling your stocks because you have too much risk or need the cash elsewhere, that is not an investment; that is speculation.
How Market Downturns Can Be Opportunities
Some may choose to adopt a contrarian view by pointing out that, well, market downturns are in fact moments of getting good assets at lower prices. This is a discipline and mastery of the emotions, particularly when bearing the shocks usually created by the media and social platforms during bad market days.
The key is to remain confident in the investments that have been made and to concentrate on the growth of the companies. Again, there is nobody that can predict the short-term stock market trends, but history confirms that most of the downward spirals are, in fact, cyclical. What used to be viewed as a market calamity, such as Asia’s financial or long-term capital, has all faded, and the markets are back.
The Bottom Line: Don’t Panic Sell
The first Golden Rule of investing is that one should not lose money. This does not mean no risks at all are taken, but it means not selling in large quantities every time there is a downturn in the market. If you are confident in the continuous prices of the stocks or any of the securities you are invested in, wait. Panic selling only ensures that everyone books a loss that could have been a temporary situation if handled in the proper manner.
In conclusion, recent market turmoil caused by the Japanese yen carry trade serves the purpose of reminding investors of a long-term disciplined approach. This means that regardless of whatever other people are doing, especially when there is fear, you should avoid being an emotional trader.
