Howdy folks, I'm back again this week with another question for Eddie. It's impossible these days to listen to, read, or watch the news without hearing about China and it's always impending economic doom.
Listen, I'm not trying to say that I don't care about the economic well-being of the country with the largest population in the world. I, in no way, want the Chinese to suffer, and I'm sure you can't have a country of their size struggle financially and not have it felt the world-over. That said, this Chicken Little is tired of worrying about the sky is falling in regards to China and my stock portfolio, so I turned to Eddie.
I constantly hear on the news about China’s slowing economy and growing debt. That sounds terrible for China, but will that impact me as an American investor? Do I need to be paying attention to it? Is there anything that I can do (or should do) to prepare my portfolio in case China’s economy and stocks suddenly take a nose dive?
Eddie Goepp, COO of Wela
Great question Mallory. And you will probably hear a lot more about China too, well, as soon as the “Brexit” vote goes down and until Greece’s debt troubles bubble up again. By the way, those debt woes aren’t resolved, they’ve just been sufficiently kicked down the road for the time being.
China is the world’s second largest economy based on GDP, (gross domestic product) so it is important. But the slowdown is really more a result of the change in the type of economy China has. Historically, they’ve been largely industrial and manufacturing based and now are moving to a consumer based economy. Similar to the United States. But let’s look at their slowdown. Last year, in 2015, the U.S. economy grew by about 2.4%. China, on the other hand, grew at 6.9%...about 3X what the U.S. did. However, we’re used to seeing double digit growth numbers come out of China over the past 25-30 years. In 2010 for example, China grew at about 10.6%.
So what does this mean for you? Well, not a whole lot really. As long as you’ve got a diversified portfolio appropriate for your goals and time horizon. If you look at the S&P 500, the largest 500 domestic companies by market capitalization, only about 2% of revenues come from China. Not a huge number. So the only thing you can do is maintain a properly diversified portfolio and rebalance. Don’t over-expose yourself to China (or emerging markets for that matter) and rebalance once or twice each year.
And there we have it! It looks like China's economic temper tantrum is not something that's going to stop me from retiring someday. Whew! Now I'm off to plan my trip to Greece. It sounds like it's still pretty easy to find good deals over there...