What To Do If You Bought Stocks Before This Correction

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Straits Times Index has not been performing well so far in 2018. Year-to-date, it has dropped 7.1% and touched a one-year low of 3,103 on 11 Sept, and rebounded slightly to close at 3,161 last Friday.

Similarly, other main index in Asia had also done poorly. In fact, fared worse than STI. Hang Seng Index has dropped 12.8% this year, while Shanghai Composite has plunged 19.9% in 2018. Not a pretty sight.

STI (Black), Hang Seng (Orange), Shanghai Composite (Blue) year-to-date performance. Source: Bloomberg.com

So assuming you have started investing not too long ago in 2017, such volatility may be a rude shock as opposed to the smooth rising market we witnessed last year. And if you have bought into many stocks start of the year and are staring at some hefty paper loss, these are actually reminders that market can be merciless with its wild swing.

And this is actually how market behaves. The relative calmness throughout 2017 is actually more of an anomaly.

Market Corrects Very Often
Firstly, a correction is defined as a magnitude of drop of more than 10% but less than 20%, measured from the most recent highest point. If we look at the chart above, based on highest level attained (3,641) on 2 May, STI has retreated by 11.3% on 11 Sept. So it is still a correction, not bear market.

Bear market is defined as a drop of more than 20%. For STI to have the dubious title of reaching a bear market, it would have to fall to 2,912, still another 250 points to go.

The thing is market correction does happen often. We look at this article by Motley Fool. From 1993 to 2016, a period of 24 years, STI suffered a 10% or more draw down in 21 of those periods – a whopping 87.5% probability.

Source: S&P Global Market Intelligence

What about the recent Emerging Market drop measured by the 20% fall of MSCI Emerging Market Index since Jan 2018? Well that happened rather frequently in the past too according to this article by A Wealth of Common Sense – 24 episodes of 10% or more drop between 1994 to 2018, on average every 1.04 year we will see a drop of such magnitude.

MSCI Emerging Market Index fall of more than 10% since 1994. Source: A Wealth of Common Sense 

So the first step to do during such a time is to acknowledge that market correction is really really normal, based on info shared above. Do not over react and panic yourself into selling all your stocks.

With that established, and I hope that it calms your mind as its really not the end of the world. these are things that you can do.

Review Your Investments
You would have bought into stocks with some particular reasons, or certain opinion about its business, assets, or prospect which you have formed based on your due diligence. Now is the time to revisit them and ask yourself if those reasons still hold? Are your opinions about the companies still valid?

For example you may have bought into Comfort Delgro thinking that their business would turn around due to departure of Uber and a consolidation of local taxi industry. Look up Comfort corporate announcements, financial results and industry news to assess again if your deductions are still valid.

Maintain A Cash Buffer
Cash value does not fluctuate. They buffer your portfolio against market drop. Having cash is a form of safety net that allows you to survive the storm.

It is even the best weapon to boost your investment returns during the next market upturn, provided these cash is used wisely to pick up shares of strong companies when they are unfairly sold down to cheap valuation during correction. And the worst case is that you are all-in for stocks and have no cash on hand to buy more.

Scan Your Shopping List
Even if you have opportunity funds on hand, it is still crucial to know what shares to buy besides those stocks you are already holding. This is where your watch list comes in. Look through your watch list and review their business performance in the latest Q results. Are the prospects still as good? Are their balance sheet still healthy? Any red flags in the results? Is their valuation reasonable?

If they still pass through your assessment, now maybe a good time to start picking up these new shares cheaply.

Focus On Portfolio Performance
Usually one would have more than one stock in his holdings. If a particular company has dropped big, do not be overly obsessed about its paper loss. More importantly is to ask if that particular stock has caused too big a dent in your portfolio value? If there was proper risk management via diversification across sectors, asset class, and appropriate proper position sizing of each stock, we should not be too unduly worried about.

You may also take this chance to do some house keeping by identifying and weeding off the weak companies with high gearing and deteriorating fundamentals. What remain would be the strong companies that would bounce back strongly when market recovers.

Do Nothing
Far too often we believe that in stock investing one has to be proactively doing something to generate good returns. But the fact is that sometimes, doing nothing is a valid strategy too. This is especially true if you have bought into strong dividend counters and solid REITs for the 6% yield, and the sustainability of their dividends are still intact. Market correction should not impact your investment in a big way since your stocks are still meeting your objectives.

Of course, at the risk of over-simplifying market correction and trivialising the possibility of it turning into a market crash, I am not suggesting everyone to ignore such market developments. It still pays to monitor company developments and stay on top of market news to form an unbiased judgement.

Legendary money managers and investors like Peter Lynch, Warren Buffet, John Templeton take such market corrections in their stride. And they have a well-devised strategy to guide them on what to do when market throws a tantrum like now.

If you still lack an investment plan to serve as your action compass in different market conditions, do attend my next seminar where I will share insights on recent China market drop and my personal action plans in the current climate. Do sign up here.

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