However, experiencing the downs, along with the ups, in the stock market is part and parcel of investing over the long-term. For investors, the key is to find a way to cope with the market’s roller-coaster ride, while still being able to sleep soundly at night.
The first thing you should not do when seeing a double-digit decline in the value of your investment portfolio is to panic. Avoid letting your emotions gain control over you as it will very likely result in sub-optimal decisions being made. Instead, keep calm, try to tune out market noises and consider the following:
1. Review your portfolio to see if rebalancing is in order
Rather than selling on emotions, take a strategic approach by evaluating your portfolio. Is your portfolio well-diversified across different asset classes, business sectors and geographical regions? In the current health pandemic, stocks are losing value while other asset classes such as long-term government bonds and gold are holding firm and even gaining in value. If your portfolio is well-diversified, then you will likely be in a much better position than those with heavily skewed portfolios.
Similarly, if your portfolio is only exposed to tourism- or hospitality-related funds and fixed income globally, it may perform poorer compared to someone else who has a portfolio that is highly diversified across business sectors.
One thing you can potentially do is to rebalance your portfolio. As bond prices have increased and equity prices have dived, your asset allocation may have skewed away from your intended level. You can consider divesting some of your bigger winners in bonds and if you believe it is a good opportunity to diversify your equity investments.
By rebalancing your portfolio periodically, you will avoid having substantially higher exposure to certain asset classes that you never intended.
2. Reduce exposure to low-quality stocks
Some of you may have chosen to invest in individual stocks over a diversified fund. If so, now may be the time to re-look your stock portfolio and reduce your exposure to lower quality stocks.
Unfortunately, these are most likely the stocks that have fared the worst in the stock market crash. Often characterised by a high level of debt and insufficient cash flow generation, these companies may not be able to survive the current global health pandemic, especially if it stretches out over a longer period.
Instead of praying for a miracle recovery, it may be more prudent to bite the bullet and cut your losses on these companies. If you are able to take advantage of the depressed prices of high-quality stocks in the market, that’s where you can channel your financial resources or any proceeds you raise from selling lower quality stocks. Another thing you can do is look for an equity fund which is already well-diversified to make your buck work harder during such times.
3. Have your “shopping” list ready
“Never let a good crisis go to waste”, popularised by former White House Chief of Staff and Chicago mayor Rahm Emanuel, who famously said it during the Great Financial Crisis (GFC), one should look beyond the current loss of portfolio value and take advantage of good companies being sold at a discount.
High-quality blue-chip names have a higher probability of surviving downturns, due to its strong competitive advantage and balance sheet. They also have a good chance of emerging as an even better company as they capitalise on the inability of their debt-laden peers to stay in operations and even steal a march by competing for the best talent and strengthening their business on the back of lower interest rates and government support during such events.
As mentioned, it can be greatly unsettling to manoeuvre a steep downturn, which may lead you to make poor investment decisions. If you have a “shopping” list of equities you want to invest in, you may have a clearer mind in pulling the trigger on those investments. Similarly, you can shortlist funds invested in a diverse basket of equities you want to gain exposure to.
For instance, the Schroder Singapore Trust has an investment objective to achieve long-term capital growth through broadly diversified investments in SGX-listed companies. With a fund size of $767 million, it is invested in well-known Singapore blue-chips such as DBS, OCBC, UOB, SingTel, Keppel Corp, City Developments, CapitaLand and many more.
You could have been eyeing the strongest companies in the US before the current pandemic caused prices to decline as much as 31%, even though they have subsequently experienced a recovery and is now down 11% year-to-date (as at 29 April). An example would be the Legg Mason Clearbridge US Large Cap Growth Fund that offers you access to some of the biggest and most renowned companies including Amazon, Microsoft, Facebook, Alphabet, Visa, Apple, Adobe, and Thermo Fisher with a single investment.
What you need to avoid doing
1. Panic selling your entire investments
When some people realise their investment portfolio is losing more money each day, their first instinct can be to sell off all their investments and go into cash. While cash might be king in the current context, it generates zero income and often depreciates due to inflation.
The problem with such a strategy is that markets can often turn on a dime. Sharp rebounds often follow sharp declines. In fact, the S&P500 has already recovered 25% since its lowest point in 2020 (as at 29 April 2020). If you panic sell, you may bear the brunt of the sharp decline and miss out on the sharp rebound.
2. Staying out of the markets
Slamming your investing strategy to a halt is also not a wise decision.
If you are investing a small sum of money every month or every few months, to dollar-cost average into the markets, you should continue to do so. Similarly, if you are a value investor seeking to buy assets at a price with a sufficient safety margin, the fear of the current decline should not keep you entirely on the side lines.
If your goal is to wait until you are 100% sure that we have already passed the bottom before investing or reinvesting, you will likely have missed some of the greatest stock market recovery days and that may make a substantial difference to your long-term returns.
3. Speculating on equities to “recoup” your losses
Now is also not the right time to buy on emotions. While equities may seem “cheap” at the moment, there is also an elevated risk in the current climate. We should not be buying equities to make a quick buck, instead, we should continue our investment strategy to invest at regular intervals or when we see a good opportunity.
At some stage when your investments are losing a substantial amount of money, there is a tendency for the “Go Big or Go Home” mindset to kick in. The target prospects might often be these penny stocks that can potentially double or triple in their value in a short period, thus potentially recouping all your losses. This becomes akin to gambling than actual investing.
Some may even leverage their portfolios in hopes that a quick recovery will see them profit very soon. However, even if a recovery does happen, this strategy will very likely not pan out as volatility continues to be high and you may find yourself constantly having more stress over your portfolio
4. Obsessing with the value of your portfolio
Having online access to your brokerage and platform accounts can be a double-edged sword. On one hand, it makes access to your trades simple. Portfolio performance can also be reviewed instantly.
On the flip side, it makes obsessing over losses easy as well. This can be bad for your finances and your mental health, particularly in a volatile bear market. Wild swings in the stock market can make even the most level-headed investor second-guess their strategy, leading to irrational investment decisions and even stress and depression.
When you find yourself becoming overwhelmed by your investment losses and every single negative market news daily, take a step back and go back to the TO DOs highlighted above.
Multi-asset funds might be the solution
For investors who find it extremely stressful to monitor their portfolio in a bear market or do not have the expertise to do so, an easy solution might be to re-allocate capital into multi-asset funds. Such a fund diversifies across different asset classes and geographical regions which ensures that a drop in one asset class will not put all your investments in danger.
With access to over 1000 professionally-managed funds across diversified investment instruments, dollarDEX enables investors to put their money into a wide range of more than 90 different multi-asset funds.