Since the start of the year, the stock markets have not been performing well. The Straits Times Index (STI) has fallen by about 6.5% since the start of year. If you measured the loss since July 2015, the market has already fallen by about 20%. At the moment, not many people are expecting it to rebound anytime soon given the uncertainty over China’s economy, US interest rates and volatile oil prices.
So the question people are asking is whether or not they should still be buying stocks this year? Or if it would be worth waiting on the sidelines for this year?
Bad Market, Great Discounts
Everyone loves a great discount. It could be a grocery-shopping discount, a credit card promotion at a restaurant or an awesome Groupon travel deal.
When the economy is bad, people tend to spend less for a variety of reasons. Some may have lost their jobs, others may have suffered a pay cut and are forced to operate on a tighter budget. Those who are not affected may want to buffer up their savings and be more prudent on their spending.
During these times, it is common to see retailers dangling discount to entice customers to buy their products at a lower price.
The same logic applies to the stock market. When the market is bad, people tend to invest (i.e. spend) less. Some people may even sell some of the stocks in their portfolio to increase their savings. This is a perfectly normal reaction.
Since the stock market works on a supply and demand principle, it is during these times where you can find a discount on some of the stocks you were always looking at.
For example, DBS stocks were going at 19.76 at the start of July 2015 and are now selling at 13.59, a price reduction of about 31%. SingTel have gone from 4.26 in July 2015 to 3.70 (- 13%). Companies that are heavily affected by the drop in oil prices such as Keppel Corp have went from 7.75 to 4.94 (-36%)
There Is Never A Good Time To Buy Bad Companies
Let’s be clear about this. There is never a good time to be buying sub-par companies.
We are not sure about you, but we have always been highly skeptical whenever we see products that we are not familiar with or have sketchy origin trying to market themselves by putting up such advertisements.
We are reminded of one of Warren Buffet more famous quote, “price is what you pay, value is what you get”.
Simply flashing an advertisement saying that a product used to cost more than what it is selling at now does not automatically makes it a good deal.
Likewise, when it comes to investing in stocks, people need to be reminded that there is never a correct time to be investing in companies that were not that good to begin with, regardless of how cheap they now appear to be compared to their historical price.
An economic recession almost always reveals which are the bad companies that people should not have been that interested to invest in in the first place.
As savvy investors, we need to differentiate between the types of companies to be investing in during a market downturn. Invest in the right company and you could get a good investment on the cheap.
Invest in the wrong company and all you are getting is a bad investment that happened to cost less than it used to.
Different Types Of Companies
It is important to understand what type of companies you are investing in. Some companies are in sectors that are naturally cyclical in nature, such as the oil and gas sector. Others are dependant on macroeconomic factors such as interest rates, which affects the borrowing cost of Real Estate Investment Trusts (REITS).
Some are dividend-paying companies whose main risk could be the lower profits they may get during a recession (i.e. telecommunication companies)
How The Average Person Can Manage Risk
Most of us are not professional fund managers who have the time and expertise to constantly monitor the market and to search for the best time to buy a stock. We worry about investing today because we are afraid the stock prices will continue falling tomorrow, or next week, or next month.
Here are some simple tips to help us manage these fears.
Dollar Cost Averaging
Always assume that you will never be able to catch a stock when it hits rock bottom.
The solution to this is to do a dollar cost averaging for your investment. Rather than to save up for the entire year and to then invest a lump sum amount at one go, a better approach would be to make regular investments into the market. For example, if you are setting aside $1,000 a month for investing, why not consider investing $2,000 every 2 months, instead of $12,000 at the end of the year.
Dollar Cost Averaging ensures that you buy more stocks when prices are cheaper and less stocks when prices are more expensive.
Read Also: The Art Of Not Caring About The Stock Market
Think Long Term
The other way to manage your risk is to think of your stock portfolio as a long-term investment. For most people, this is easier said than done.
The problem that people have whenever it comes to investing during a downturn is that they will give excuses such as “the price may continue dropping till the end of the year” and “the economy may become worst next year”.
Which is more important? Ensuring that you are investing in a good solid company that has a future over the next 10 years, regardless of the ups and downs of the market, or the forecast for next year’s market, which by the way no one can really guess.
Many so call long-term investors end up being more worried over how the stock market would be next year, instead of being worried if they are investing in the right companies to begin with.
That’s why we frequently see “long-term” investors becoming short-term investors once the market starts turning against them. They are more concern over what will happen in the next 10 months, rather than the next 10 years.
Never Borrow To Invest
There is a common saying that “there are both good and bad types of debts”.
Some good type of debts may include businesses borrowing money to invest in a new product they are launching, or an expansion of their existing business into a new country.
We like to stress that you, a retail investor, are NOT a business. You are an individual. Regardless of what you think you might have learnt during get-rich quick seminars that you attended, never ever borrow money to invest into the stock market.
Professional investors like Warren Buffet, George Soros and Peter Lynch may do that for their investments. You are not these people. So for your own sake, and those of your family, avoid borrowing money or leveraging when you invest in the stock market.