Five Things to Do During a Correction
My friend always said, “The stock market is like a box of chocolates. You never know what you’re gonna get.”
Sure enough, when the US stock market started breaking new highs in January 2018, the Dow Jones Index plunged 660 points on 2nd February, followed by another fall of 1175 points the next day, signifying the beginning of a correction. A correction is defined as a price decline (for stocks, bonds, commodities, indexes and so forth) of at least 10% from the peak. For instance, the Dow Jones Composite Index had fallen to 23360 from its peak of 26617. That was a decline of 3257 points or 12.2% decline.
So what caused the correction? A few possible factors have been reported, such as the high budget deficit, increased bond yield, higher inflation, higher chance of interest rate hike and etc. Regardless, I believe the main reason is that we have not had a correction for a long time. The Dow Jones Index was only around 18000 points a year ago. Since Donald Trump became the US President in November 2016, it has gone up steadily for 15 months and surpassed 26000 points in January 2018. It was an increase of 8000 points, or a 30% rise within a year. Therefore, is it really a surprise to have a correction? Probably not!
The next question is what should we do? Before we discuss that, let’s see how our portfolio has fared when there was panic selling everywhere. Here is our portfolio summary on 13 February 2018:
As you can see, while the table has showed a gain of 268% since November 2015, the three counters we bought lately have gone into red due to poor market sentiment. Since the whole market is performing equally bad, we adopted a ‘stay put’ strategy and did not perform any buying or selling transaction this month.
Meantime, to update our portfolio, there were share split and bonus share exercise done by JHM and Masteel respectively. For JHM, there was a subdivision of every one existing ordinary share into two ordinary shares, whereas Masteel has given one bonus share for three existing shares. Both counters’ share prices and quantity have been adjusted accordingly.
Now, let’s look at the five things we can do during such volatility:
1) Never panic sell
Most people panic sell and if you do what everybody does, you’ll get what everybody gets, which is mediocre. Instead, wear the investor hat and identify the share price’s support and resistance. This would give you an idea of your loss cutting point or entry point.
2) Set your Bottom Line
The reason you may stay calm amid uncertainty is that you know how much you can afford to lose. For example, you normally set a loss cutting point at 10%, but in such a volatile period, you can increase up to 20%, depending on your risk appetite. As long as you have a bottom line and monitor the macro condition, you’d feel a sense of control.
3) Look at how the Dow Jones, S&P and NASDAQ perform
The three above indexes represent the macro condition.
Since this global correction is caused by the US stock selling down, it’s important to know if these indexes are still in good shape, such as if they are still supported by the critical Moving Averages (MA) MA50. If the answer is ‘yes’, it’s a healthy correction and the uptrend would likely to continue but if the answer is ‘no’, you need to be a bit more reserved and observe before make any decisions.
4) Act as a contrarian
You’d only have the courage to act differently if you understand how things work.
If you know the macro remains intact and your company’s prospect remains bright, you will be confident to buy when everyone else sells.
Alternatively, you may consider switching.
In bad times, good companies would exert certain resilience, as people are less likely to let go because of their sound fundamentals. Therefore, if you have identified those companies, it’s a good time to switch from those underperforming companies to good ones.
In essence, real gold is not afraid of fire. Do realise that market correction and volatility are part of the game. Let us keep on learning and enjoy the ride.
Binyuen is the founder of BY Enrich Resources and the author of ‘Life beyond the Comfort Zone’ and ‘Profit from Share Investment’. His books are available in major bookstores in Malaysia, Singapore or online http://www.teybinyuen.com/profitfromshareinvestment