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Protect your Portfolio from Putin & China

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Do events overseas, like a newly belligerent Russia and a slower-growing China, make you nervous about your portfolio? Absent a full-scale war in Eastern Europe or a complete collapse of the Chinese economy (both possible yet doubtful), your holdings should be OK.

Russia and China are among the factors that weigh down U.S. stocks thus far this year, along with concerns about sluggish economic growth and tepid future corporate earnings growth. And American investors are anxious these days: The skid stocks took in 2008-09 made everyone from millennials to the Greatest Generation anxious about any string of down days for the big indexes.

Yet the Russian stock market has suffered far more than ours since it annexed Crimea, formerly a part of Ukraine. From a recent peak in mid-February to a month later, Russia’sMICEX index tumbled 18%. With the easing of war talk and the U.S. saying it won’t use military force in the dispute, the Russian exchange crept back up to just 7% off its high in early April.

True, anything could happen up ahead. In the Ukraine, the situation is fluid. Russia wants the real estate (its Black Sea naval fleet is based on the Crimean peninsula) and is massing troops on the border for possible deployment in Ukraine’s eastern section. The cost: economic sanctions, probably harsh ones.

At first, the moves were largely symbolic: a suspension of the 2014 G8 summit and the talks on Russia’s entry into the Organization for Economic Cooperation and Development, and asset freezes for individuals and companies deemed to be hurting democracy in Ukraine. Additional “serious” steps could include financial sanctions for Russian banks, an embargo on arms exports to Russia, and the European Union opting to get more of its energy supplies from other nations. Russia supplies much of the EU’s natural gas, via pipeline.

Russia recently raised gas prices in the Ukraine by more than 80%. The Kremlin could also freeze assets on euro-zone companies doing business in the Ukraine, along with continuing the staged war games near the Ukraine. The truth is that the West has very little ability to retaliate against Moscow, which translates into a status quo that is unwelcome, except that it likely means little damage to the markets.

Adding to investors’ anxiety this year, China is not growing as fast as it has in the past, when it regularly expanded at a double-digit clip. The World Bank recently cut its full-year projection to 7.6%, from 7.7%. Its exports were down 18.1% year-over-year in February. Analysts polled by Reuters projected China’s industrial output rising 9.5% across January and February, but the gain was actually just 8.6%. The Reuters consensus for a yearly retail sales gain of 13.5% for China was also way off; the advance measured in February was 11.8%.

These disappointments further shook Wall Street and rocked the metal markets. A little known fact is that besides being the world’s top copper user, China also employs the base metal as collateral for bank loans, so falling cooper is a double whammy in China.

As Chinese Premier Li Keqiang noted on March 13, the nation’s 2014 growth target is 7.5%. But the respected (and very bearish) economist Marc Faber told CNBC he suspects China’s growth is more like 4%. The upside, Faber commented, is that 4% “growth in a world that has no growth is actually very good.”

We never truly know what tomorrow will bring, so we don’t really know what will happen on Wall Street although we can always make educated guesses. Now is a time to not panic and instead be calmly focused on a) Are the gains in some areas of your portfolio over the last few quarters well above target? b) Is now the time to rebalance into assets that have lagged the past few years? c) Is it wise to increase cash while actively looking to diversify your portfolio across different asset classes included alternative investments?

Concentrate on your strategy when turbulence affects the markets. History has shown that staying in the market can prove the right move, even when the news seems cataclysmic (say war with Russia). The bull market that began in March 2009 is nearly the fifth longest lasting in history. Just look at how stocks have rebounded, and hit new highs, since the precipitous fall the Standard & Poor’s 500 took during the recession. Sticking with principles of diversification can prove wise in both challenging and record-setting markets as long-term focus and patience have rewarded investors in the past.

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