Saturday, 30 January 2016

How to React to a Market Downturn

Oh wow, what a tumultuous start to 2016. So how has it been for you?

Given that within the first month of 2016:

1. The Chinese equities market crashed yet again;

2. Price of oil fell below $30, a level not seen since a decade ago;

3. Investors around the world seems to be reeling in shock from the above news and are withdrawing from the market, bringing assets prices (equities, commodities, everything!) crashing down; a reminiscence of the market crash in 2009.  

On a personal note, my portfolio has decline by about 20% during this period of market uncertainty. 

However, I am taking comfort in the fact that I am not the only one who is experiencing the heartache as well as the myriad of emotions that comes with a declining portfolio. Right guys? 

In fact, I believe you will have at some point of time, become confused, fearful, and panicked over your position in the market.

Likewise, so am I. 

But what have you done in reaction to this sudden downturn in market condition? Beside panicking of course..

Now now, please allow me to give a disclaimer first. 

This post will not be a guide on what you should do to maximize your returns in a crashing market. I am far from qualified to be able to do so.

Instead, I am just going to share my plans and thought processes, which has enabled me to remain as calm and rational as possible in such a volatile period. 

What's the major benefits of staying calm and rational you ask?

1. You are less likely to make hasty and silly decisions that will adversely affect your investments returns in the long term.

2. Hmm..Instead of having sleepless nights due to the constant worrying, staying calm allows you to get a good night sleep baby. Every single night. 

So what are my thought processes and plans during this period of great upheaval in the market?

  • I sat on my portfolio, à la the "lazy style", with no plans for divesting any of my downtrodden assets during this crazy period.

  • This is because I know that my plans are for the long term. Studies have shown that 20 years down the road, my plans such as the purchase of ETF, will still give me positives returns regardless of how badly the market is currently doing.

  • In fact, the current market fall of 25% from its height is to be expected and I have already factored in such market crashes during my planing. During the 1997 Asian Financial Crisis and the 2009 Global Financial Crisis, several equities market, such as Singapore, crashed by more than 50%! And then the market recovered abruptly.
Look! There will always be a recovery after every crash.

  • Hence, whenever I feel like panicking and off loading my equities at a loss in this bearish market, I will tell myself not to be rash and think long-term instead. 

  • If I still feel uncertain and worried, I will refer to my previous posts where I have detailed my investment plan. When I read my previous postings, I am reminded that I have a plan and the downturn has been factored into my plan. Hence, I should continue to stick to my plans and not be swayed by my emotions.

  • We must also realise that a market downturn is also a good buying opportunity if we wish to remain vested for the long term. By re-reading my previous posts, I am reminded to purchase undervalued assets when my target price is hit. This is contrary to my previous experiences when I did not have a plan and hesitated to invest when the price was attractive, causing me to lose awesome opportunities to be vested in greatly undervalued assets.

  • There is also my personal experience in the market since 2008. Throughout these few years, I recognized that at the first sign of a downturn, speculators and so-called industry "experts" will bash the market mercilessly, either through very pessimistic analyst report or by aggressively shorting the market, causing further panic and mayhem in the market.

  • But yet, as if on command, all these speculators and  industry "experts" will suddenly sing praises of how the market is set to recover, and manipulate the market to recover swiftly. While the majority of us, the retails investors, are left in their wake and will not stand to benefit from the sudden market recovery if we had sold off our equities in a panic during the market crash.

My point is this guys. There is no need for us to do anything during a market crash if we have a well thought-out plan. Get on with your life for the world is not going to end and things will normalised in time to come.

Instead of panicking and trying to cut your losses, why don't you take this opportunity to observe the market and see for yourself that the market indeed functions in a cycle. Gain some knowledge and experience in dealing with a market crash, and factor what you have learnt into your investment plan. And stick to it!

Photo of Missus PassivePeon, taken at the Singapore Sport Hub.

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