There can be one word to describe global stock markets during the past 2 weeks: crazy. China’s abrupt devaluation of its Yuan has led to fears of competitive currency devaluation among other countries, and has sparked a worldwide meltdown in the equity market.
The US Dow Jones, Euro Stoxx 50 (Europe stock index) and Nikkei 225 (Japan’s stock index) have all experienced steep declines of over 10% within the month of August itself. China Shanghai’s index was the worst hit, down an alarming 25% over the same period. Not surprisingly, Singapore’s benchmark Straits Times Index (STI) was not spared either. Closing at 2,873 on 25th August, which represents a shedding of about 10% over just 2 weeks.
In the face of such a correction, what can investors who are now holding on to losing positions possibly do? Let’s remind ourselves on some of the useful tips worth remembering in this volatile market.
We identify 3 actions that you can take below.
1. “Trim” your portfolio
It is likely that the first thing that comes to mind would be to check how well (or rather, how badly) your portfolio is doing. Performing a regular review of your portfolio is an important part of investing, as it allows you to reduce the allocation of stocks you are not comfortable with. You need to also ask yourself if the companies you are vested in can weather the downturn.
One example would be Keppel Corporation, which has been hard hit by plunging oil prices. In addition, things aren’t looking too good anytime soon, with the slowing growth of the global economy (weak demand) and over-supply of oil by U.S. producers.
In these bad times, it is always helpful to reflect back and ask yourself the original reason on why you “fell in love” with the company in the first place. If the reason(s) still holds true, then you shouldn’t be too worried. If the reason(s) ceases to be true anymore, it could be time to relook your interest in the company.
If you can’t even recall the reason you bought the stock in the first place, then you really have no business owning it at all.
2. Prepare watch-list
In a previous article, we touched upon how you could mirror stock investing to grocery shopping. When it comes to a market downturn, picking good quality groceries at a discount is akin to picking fundamentally strong companies at rock-bottom prices.
Still, most investors missed the boat whenever a downturn strikes, as they are not sure what they should be buying into. By the time they are mentally prepared to invest, the “discount period” may have ended. Therefore, creating a watch list helps you to streamline your desired stocks and prompts you to pull the trigger when a real bargain is spotted.
3. Nibble bit-by-bit
Lastly, no one can time the stock market, just like how no one would have predicted the 10% slump in the STI due to the devaluation of the Chinese’s Yuan. Hence, a good way to go about investing during a downturn is to acquire your favorite shares slowly and steadily, rather than to plow everything in at the hopes of a quick rebound.
Simply put, this is call dollar-cost averaging, where you purchase a fixed dollar amount of a particular investment on a regular schedule (i.e. $100 on OCBC), regardless of the share price. The benefit of this is that you buy more shares when prices are low and less shares when prices are high, which will add up significantly over the long run.
No one likes to nurse wounds amid a bleeding portfolio during this difficult period. Nevertheless, the course of action taken during this volatile period is what would sieve out the good investors from the bad ones.
Royalty-free image From GettyImages. Used with appreciation