Monday, May 6, 2019

The Stock Market Crashed Today!! Admit If You Shit In The Pants Today

It’s been a while since we last hear of something negative in the markets which sent markets across the globe plunging which most investors have to face in their routine battle against the market. 

With the infamous Trump’s Trade Tariffs back with more vengeance this time, this escalation has sent markets across the globe spiralling down and dropped heavily in today’s trading with Dow Futures down as much as -450, SSE down by 5% and STI down by about 3.3%. 



The media will always use scary-sounding headlines in order to catch everyone’s attention. Bombarded by negative headlines, investors may be nervous and tempted to do something in reaction to the news. 

The first and foremost reaction for most investors on the street is to panic because it’s not something they experience often in the market and it’s never a nice feeling to see your portfolio account balance drop massively in one day’s worth of trading in the market. If you are buying part or most of your equities under the margin account, you might get a bit more unsettling than your usual self because this drop could prolong for a longer period of time while you have to bear the interest costs while waiting for your counters to recover. 

On the other side of the spectrum, there are investors who have been waiting for a pullback and they are likely to rejoice because they can finally put their capital to use after waiting for a period of time. Since they were forgoing opportunity costs all these while waiting, the issues these investors might have is when to market time it nicely such that their capital is allocated to the most optimal situation. 

But your best move is probably to keep calm and carry on with your usual activities as these kinds of market panics are usually short-lived and investing is usually a long-term pursuit. 

If you find yourself somewhat panicking a little during market’s bloodbath today, you may want to review the following checklist: 

Risk Appetite 

This is probably going to be the most basic but important exercise everyone has to assess regularly. 

Gauging the degree of risk appetite at any given point in time is highly relevant from a risk awareness perspective because hindsight episodes of decline in markets can spike general interests in assessing risk appetite and tolerance. 

Ask yourself if you are panicking because you have too much of your portfolio allocation invested in the equity market, which can generally be more volatile than the bonds or fixed income sector. If this bothers you too much at night that it disturbs your sleeping routine, then it is likely that you have vested too much interests and it is probably a good time to scale down your vested interests to a lower allocation. 

Company’s Fundamentals

This is probably also a good opportunity to do reviews on the company’s fundamentals to ensure that they are still sound. 

Depending on the event of the macro news that happen during the week, this may potentially impact the future earnings of the company as the company’s valuation may depend on it. 

For instance, the tariffs imposed on Chinese goods means that it will cost more to import Chinese shipment to the US which will impact the profitability margin as well as demand for the goods. 

Stick To Your Game Plan 

The general rule of thumb in investing is always to look at it from a long term view. 

Thus, it is imperative that investors continue to look at downturn as an opportunity to add to their positions and not succumb to fear because good companies will always recover when the market eventually rebounds back. 

For instance, if my goal is to ultimately amass an annual dividend income of $100k/year, then it makes sense for me to focus primarily on the cashflow earnings of the company and ignore the daily gyration of market prices. Even better, if the company gives out the same distributional payout but is now cheaper in price, then it makes more sense to add on to the portfolio in view of the longer term advantage. This becomes a problem and will always be if market timing is a factor to consider. 

Conclusion 

While most investors say they’ll continue to hold on to their investments when there’s a sharp downturn and many even say they’ll add money when their investments go down, data often tells a different story. As the market downturn escalates, you’ll see more people selling in order to “get back in” later at a cheaper price. This behavioural bias has and will continue to be around for as long as there are volatility in the market. 

In any case, I think that it is good that we have a stress test like what we have today in preparation for a bigger meltdown in the future. If this prolongs for longer period of time, then this could become real interesting to assess.

Thanks for reading.

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9 comments:

  1. But your best move is probably to keep calm and carry on with your usual activities as these kinds of market panics are usually short-lived and investing is usually a long-term pursuit.

    I find this as the best advice. Honestly, we shouldn't get too panicky with the downturn. Things can really change fast.

    ReplyDelete
    Replies
    1. Hi MMF

      Exactly. As it appears a day and the market rebounds already. We'll just have to see what game it brings us.

      Delete
  2. Hi,

    The best approach is to buy and hold on for the long term. Focus on personal interest, is the way to go.

    Ben

    ReplyDelete
    Replies
    1. Also, not to take any excessive leverage and worse, quit your job while you are at it

      Delete
    2. Hi Ben

      Thanks for your advise.

      Indeed focusing on the right thing which is the long term is the way to go about it.

      Delete
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  4. Hi B ,

    Are you keeping a warchest ready in case this happens. From your write out on the DBS multiplier account. Seems like you have the dry powder.

    On a side note, as the good investors dp , and I am sure you are one. A shopping list of stocks which are rigorously studied should be already compiled.

    Would you be looking now at growth type stocks rather than the dividend plays ? Or more opportunistically at the market depending on what it throws at you.

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