What Can Be Learned Here?

A persistent reader left the following comment.

Roger and everyone??,
REAL question. I own funds that have been killed in the last few weeks, as has everyone, BUT some of them like my Latin America, Russian and Emerging Market funds {All rated 5 stars} are down almost 20% in those few weeks. Is their a end in sight??? Why are these markets getting killed more then domestic? I am down 8% or so domestically, but nothing like what has happened with foreign. Thoughts and ideas???? Do I hold on all the Foreign funds or sell into the panic {which I know is stupid unless it keeps getting smashed}?

OK, there is a lot there. It seems, but there is no way to know, that this person has assigned a fair bit of emotion to this. My initial reaction is that this person has too much volatility for their own comfort level, down 8% on domestic seems like a lot when compared to how much the S&P went down.

That his emerging market funds are five-star means nothing to me. When you buy into different parts of the market you are capturing certain effects, for better or for worse. If emerging goes down by X, you have to expect that whatever you own in that area is going to be close. A couple of individual emerging market stocks I own for clients did a little better than the ETF I use, which I find interesting. One of the stocks I use did almost the exact same thing as the ETF.

Capturing the effect is why you own it in the first place. Perhaps you own too much?

The reader asks why this is happening to emerging markets. As an asset class they went up a lot. Emerging markets are likely to do better (this may be more about perception and be short lived) with a the dollar a little steadier than it has been. Recall the dollar puked down for 71 days in a row (or thereabouts) which contributed to the emerging market dislocation we just had. A weaker dollar is OK, the move down was quite severe which I believe (not an original thought) dominoed into the emerging market stock decline.

The reader asks if he should sell. Right now this stuff is all up a lot today. If he owned things he could sell during the day I would tell him to reduce right now, 45 minutes into the day. This has nothing to do with forward looking analysis, my take on the email is that he owns too much, emotionally. Further I don't think this person has any type of exit strategy at all, which I think is a big mistake, given the tone of his comment.

I was very open about the timing of how I reduced my exposure in this part of the market. The sales in April look good for now and the partial sale yesterday of IIF looks bad for now, goes with the territory. Good or bad hopefully the limited role played by emotion came through in the writing. The IIF sale may appear to be one of emotion but I decided over the weekend that I would probably sell and confirmed it when the market opened.

Hopefully you can learn from this person's experience.