How The World Can Avoid the Next Evergrande Group Crisis

Even more, The China Evergrande Group debt crisis is getting worse every day. Will it affect your shares? Possibly, at least in the short term. Above all as International bond sales by Chinese developers have all but halted.

Why Did Evergrande’s Share Price Collapse?

When you look at the numbers, the Evergrande Group debacle was inevitable. The company borrowed too much ($300,000,000,000 – three billion dollars) and then could not afford to repay even the interest. Added to that is the way Evergrande has over-diversified from its property roots.

Were Chinese Property Companies a Good Bet?

Growth in China has been driven by property and infrastructure construction. Over the past six years, the construction bubble has grown and grown. Now, it’s popped. We can see deserted building sites in every Chinese city, with no activity on partially completed apartment blocks and office buildings. Then there are the completed, but empty buildings with no tenants.

Chinese property was a good bet 20 years ago, but the writing has been on the wall for a long time, it’s just that nobody wanted to see it.

What Happens Next?

In many ways, the Chinese government is treating the Evergrande Group as a sacrificial lamb. A full-blown bailout is not going to happen. The best investors can hope for is that vulture funds come in, buy the debt for 10c on the dollar, break up the conglomerate, and repay bondholders a tiny fraction of their investment.

Were Evergrande Group Investors Unlucky?

There is always a certain element of luck in any investment. However, investors had their blinders on, thinking the good times could last forever.

How Can You Make Your Own Luck when Investing?

1. Know Yourself

How much can you afford to lose? Any stock market investment has some risk. You can reduce the risk, but you can never reduce it to zero. How much risk are you happy with? Are you a trader or an investor? If every blip in the market is going to raise your blood pressure, then you need to find long-term low-risk ways to invest. If you can stay calm when you see the prices of your stocks fluctuate, then short-term trading might be more your game.

2. Educate Yourself

Learn how the market works. Learn the jargon. Even more, learn how to read charts, including candlestick charts and moving average stock price graphs. Understand risk/benefit analysis. Do all this before you even start looking at where to put your money.

3. Research

Investing without research is just gambling – It’s like picking a winning horse in a race because you like its name. Know the companies you invest in. Understand the market segment. Familiarize yourself with the competition.

4. Diversify

Only a fool puts all his money into one stock – There is too much that can go wrong. Minimize your risk by spreading your money around in different investments in different areas of the economy, even in different countries’ economies. The minimum diversification you should aim for is to invest in ten stocks in different market sectors.

5. Trade Indices Rather than Individual Stocks

Trading individual stocks always carry risks. How can you reduce your risk if you don’t have enough capital to diversify your stock holdings?

Trading an index – also known as a basket of stocks – is a much safer strategy than trading individual stocks. When you trade an index, you can start trading with a few hundred dollars rather than the larger amount you would need to buy a balanced portfolio of shares.

6. Start with a Demo Trading Account

You WILL make mistakes when you start trading, so you will lose money. Luckily most trading platforms offer a demo trading account facility where you trade with virtual money. Losing virtual money will only hurt your pride, but you will get over that.

7. Stop Loss Positions

Some of your trades will go wrong. They will go down and keep on losing you more money every second you stick with them. You can decide how much of a loss you can afford to risk and set an automatic stop-loss position to sell once the price falls to that point.

8. Avoid Excessive Leverage

Leverage is good, up to a point. It means you can borrow money from the broker, make bigger trades, and make more profit. However, you can also make more losses. Some brokers will let you leverage by a factor of 30 or more. This is too much for a new investor. Leverage by two or three is perfect to start your trading with. It allows your funds to grow faster than with no leverage, but the extra risk of losing money is reasonable.

Your Takeaways

You can avoid crashes like the Evergrande one. You just have to use the strategies outlined above to reduce your exposure to one stock. Trading indices is the key to diversifying your portfolio with limited funds.

 

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