It’s all over the news. China’s circuit breakers have been activated twice this year, and the year just started. A simple search on ‘China Stock Market’ led me to all these news, and they are pretty recent. With all these news being splashed around the media, no doubt it would cause a big reaction in the market. As investors, I think it’s moments like these that we need to remain calm and ask ourselves, “Should I be afraid?”. What exactly does a crash mean to investors? While it’s easy to see the obvious (Falling stock prices), have we failed to see something more important? As prices fall, apart from market value being taken out, so is risk. I repeat, apart from market value being taken out, so is risk.
Let us not forget that we are in for the long-run and it would be naive of us to hope that we never go through a bear market. In fact, we should be quietly optimistic for a bear market because it’s an opportunity for us to load up on quality stocks that pay well in the long-run! The stocks that survive the crash, should it happen, would further convince us that their balance sheets are strong and are worth investing in. A bear market will test the resilience of a stock and it acts as a natural filter to sieve out the good companies that are cheap as well! Instead of being blinded by fear, let us find the opportunity in the circumstances.
Everyone has a different strategy and there is no one-size fits all. I will simply lay down some of the different strategies that I know investors are taking and you can decide for yourself which you would prefer. If you’re keen to share your strategy, leave it in the comment section below! I’m sure we can all learn from one another.
While your portfolio is taking a beating, you can’t exactly be sure if it’s just a minor correction as markets have shown itself to trick investors over the decades. You are confident that your portfolio is an all-weather portfolio and will continue to do relatively well even in bear markets. Who knows if this is another trick by the big boys to flush out and scare the retail investors, so you decide to stay invested lest you miss out on the sharp rebound when it happens. You would hate yourself if you sold off at a 10% loss and miss out on the 30% run afterwards. Also, you tell yourself that you shouldn’t allow the market to tell you what to do, because you’ll put yourself at the mercy of the market’s whimsical emotions. You tell yourself that you are in-charge and not allow emotions to impede your investment decisions.
You know that in the long-run, the market always goes up. You adopt the Dollar-Cost Averaging(DCA) method, and average it out, riding through the entire bear market and come out feeling richer as prices normalise or moves into the bull market. This method requires deep pockets and a belly to stomach loss. How would you like to add on to a losing position? It’s almost like doubling up on a blackjack table after consecutive losses. Let’s not forget about fees involved. The only person who will feel richer in the bear market would be your broker. To play it safe, I would only recommend DCA to Index Investing (STI ETF).
While you know the importance of staying invested, you don’t want to be caught with your pants down when the market runs up without you. Who knows if the next bull ride could be the biggest move of all time, erasing all losses incurred during the bear market and leaving you with much more to spare? It has happened before and it will happen again. Although you cannot fully participate should such a bullish move occur, you would on one hand be glad that you didn’t sell off all your position because now you still get to participate in the move.
What’s the point of taking a loss when I can buy back later right? Why not sell now and buy everything back later when prices have fallen. As they say, ‘Cash is King’ in a bear market. A lot of opportunities will arise and having cash on hand means you have a greater bargaining power. This is especially true for property investors. I know some of my friends’ dads have bought condominiums at a very beaten down price and stretch their bargain by paying more cash upfront. A couple of years later, the value of their property doubled or even tripled the price they paid. Indeed, “Price is what you pay, value is what you get.” Just because you paid that much, doesn’t mean it’s only worth that much.
The Decision Is Yours
There are a lot of different methods out there to employ, choose wisely which one suits you the best. All of them works, but you must stay the course and some of them such as DCA have pre-requisites like having deep pockets and a stomach to hold on to the losses temporarily. Which do you choose? We would love to hear some of your strategies that we have missed out in the comments section below!