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Why you shouldn’t sell shares before a trade war “crash”

Last week I took at the six most popular shares to buy by volume across Australia’s popular CommSec trading platform. No surprise that the big banks such as National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) featured heavily thanks to their big dividends and the widely-held perception that they’re solid long-term bets.

I warned that an excessively high trailing yield though in NAB and Westpac’s case (7.2% and 6.8% plus franking) is often a give-away that the market expects a dividend cut in the year ahead. Although this is no big secret it still often comes as a surprise to many and can lead to further share price falls.

Just ask Telstra Corporation Ltd (ASX: TLS) investors. As such I’d be inclined to avoid buying the big banks over the next 6-12 months.

While selling volumes partly reflect not much more than what stocks are most widely held by retail investors it’s  still worth taking a look at those being dumped today and what it shows about common psychological mistakes made by retail investors.

BHP Billiton Limited (ASX: BHP) is widely traded by retail investors many of whom might be taking some profit today on the back of concerns that President Trump’s tariffs on Chinese imports could seriously hurt the Chinese economy. I’d have to agree that Trump has China in a double nelson unless it backs down in this growing dispute.

Santos Ltd (ASX: STO) shares have been on a hot run thanks to surging oil prices and after the company took onboard some significant cash injections to pay down its mountain of debt.

Rio Tinto Limited (ASX: RIO) is heavily leveraged to iron ore prices as the key ingredient used to make the steel that China requires for its giant infrastructure and construction projects. With or without Trump’s tariffs the iron ore price is leveraged to Chinese demand and total market supply.

Fortescue Metals Group Limited (ASX: FMG) is an even purer play on the iron ore price, with the additional risk of Fortescue’s giant debt pile giving the stock a bigger beta or standard deviation (as a measure of volatility over a given time period) for investors to worry about.

South32 Ltd (ASX: S32) is the diversified metals miner that is also under pressure due to fears that the Chinese economy will buckle unless a resolution to its tariff war with the U.S. is found. How long a resolution takes is anyone’s guess and as such the problem just looks like another reason for growth-oriented investors to give cyclical commodity stocks a miss.

AAA (ASX: AAA) is a Betashares exchange traded fund that aims to deliver investors a yield higher than the benchmark 30-day bank bill swap rate, which is generally a little higher than returns on cash deposits. This sugests retail investors are turning defensive.

Foolish takeaway

Generally it seems as though a lot of investors are selling in anticipation of a correction coming about as a result of an escalating trade war.

However, as famous fund manger Peter Lynch pointed out, more money has been lost selling in anticipation of corrections, than in the actual corrections themselves.

Investor psychology commonly reverts to speculative attitudes (this is a mistake) and remember that whatever every market participant already knows about a stock is reflected in current prices, whatever happens in the future is what market participants don’t already know.

Markets are forward looking so selling today in anticipation of lower prices down the line is a psychological mistake that will hurt your investment returns as an efficient market means nobody knows future prices.

In fact you’re probably better off buying stocks at cheaper prices than selling them…

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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