Nygren: Relax, and Rebalance

Much of the speculation about the reason for the market’s recent plunge has been that investors are downright scared about China’s slowing growth. But top mutual fund manager Bill Nygren says the sort of correction we’ve seen recently is simply a part of life when you are investing in stocks. And from a long-term investing perspective, he does not think China’s slowdown will have as big an impact as many believe.

“I think sometimes we just forget that the market doesn’t really need a reason to have a 10% correction, which we basically had over the past four trading days,” Nygren tells Morningstar. “They occur pretty frequently–about once every year and a half, on average, historically–and they are really nothing for investors to worry about as they are pretty common.”

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As for China, Nygren laid out some interesting numbers regarding its slowdown’s possible impact on the US. “For long-term investors … where we’re trying to estimate the value of a business five to seven years from now, it’s hard to imagine China being important enough to cause a 10% reduction in values,” he explained. He says China accounts for about 16% of world GDP, so a 5% to 10% change in Chinese output would represent a 1% hit to global GDP, and an even smaller impact on US multinational firms. “We’re seeing this as increased opportunity of values falling substantially less than prices,” he says.

Nygren says that, historically, the stock market has been the best investment vehicle, even though there are periodic corrections and bear markets. And, he says, no one has found a way to time those declines. He says investors should use the recent market declines as a chance to rebalance their portfolios. “Over a long period of time, the best way for an individual to make sure that they can sleep at night and get through these tough periods is to have a balanced portfolio and use large moves in the market–either direction–to frequently restore balance to that portfolio,” he says. “If you don’t do that, the market is taking your portfolio out of that balanced position and giving you more risk exposure to a sector that’s already performed well and maybe getting extended. So, I think most investors should take a deep breath, know that equities are good long-term performers, and take a look at their portfolio and see if they can take advantage of it.”

Nygren also talks about the pros and cons of rising interest rates as they pertain to bank stocks, why he is high on some industrial stocks, and why he thinks investors are overreacting to oil price declines, creating opportunities in oil stocks.

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