What to know if you're going to invest during a stock market downturn

Never try to time the market

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I had a ringside seat to this phenomenon played out during the circuit breaker.

When the announcement of a tighter lockdown was made on April 3, I expected a stock in my portfolio, which was already battered down, to dive even more since the shutdown would affect 100 per cent of its business.

I felt a tinge of regret then for failing to sell the stock earlier but consoled myself that since it was a longer-term investment, I should not be overly concerned with the near-term volatility.

But what surprised me was that when trading resumed the following Monday, the share actually went up. The logical explanation for this unexpected event, in broker-speak, was that the share was already oversold and since the “bad news” was not that bad, the stock recovered.

Its price continued to go up over the following two months after a higher-than-usual dividend was announced, perhaps as an assurance to shareholders that it remains on solid ground.

Had I tried to time the market by selling the share earlier so that I could buy it back at a lower price later, I would have suffered losses because the dip never happened.

Invest only what you can afford to lose

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Unless you have found a crystal ball that lets you peek into the future, all investments come with risk. For instance, no one could tell back in December that in just three months, the whole world would be “shut down”.

So if you invest all your spare cash or, even worse, invest using loans, you can find yourself in dire straits when things turn bad. Even if you can spare $100,000 or even millions, it is better to not invest all at one go but spread it out in tranches. I am very conservative when it comes to investing my hard-earned salary but if my investment has turned in a profit, I will take more risks with the profit because losing a windfall is less painful than losing your own money.

Avoid herd mentality

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The worst thing you can do is to invest based on tips from friends of a friend. Due to the fear of losing out, some people will just buy into a “hot” stock even though they have no clue what the company does.

Then there are those who are very confident because they follow the investment styles of legendary investors who have become billionaires due to their astute skills.

While there is nothing wrong in trying to learn from the best, you must realise that the chances of achieving similar success is almost zero unless you have unlimited cash at your disposal.

An investor with $10 billion can still bounce back with the last billion even if he loses 90 per cent of his wealth. That’s why they can afford to invest when the rest of us are scared stiff.

Ask yourself this: Were you busy buying up all the rock-bottom bank stocks during the 2008 financial crisis? With perfect hindsight, many wished they had but the reality was they had no money to do so then.

Let go of sentimental value

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Some investors tend to get overly sentimental after they hold certain stocks for years. And even when the outlook for the share dips, they refuse to let go, hoping that it will eventually recover its glory days.

Even worse, some shareholders view themselves as loyal customers who will continue to support the company come what may.

The reality is that the management won’t even know you have bought its shares unless you show up and shake the boss’s hand at the annual general meeting. Even so, unlike customers who have the right to demand refunds for bad deals, investors won’t get any compensation for stock losses because they are deemed to be “owners” of the company, albeit small ones.

So if you think it is prudent to cut your losses by selling the stock, do it and get some of your money back.

Long term isn't forever

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Many people seem to think that a long-term investment means buying a stock or fund, keeping it for years and then all will be fine.

This may be true for some resilient investments but it does not mean you can take your eye off all your long-term investments.

Otherwise, you may wake up one day to find that your portfolio has become worthless simply because the companies have run into financial troubles.

This is especially true now because many firms are facing the twin threats of a severe recession as well as disruption by technology.

If you don’t have time to monitor your portfolio, you should stick to less risky products such as government bonds and mark the maturity dates in your calendar.

Invest in financial knowledge

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You are unlikely to walk into a tour agency, hand over $10,000 and tell the operator to sign you up for a mystery trip.

If you won’t buy something without knowing what it is, you should also never invest in something you don’t really understand.

For instance, you should remind all the seniors in your households that if all they want is to put their money in fixed deposits, they must never sign up for anything that offers higher rates, no matter how attractive it seems, especially if they do not understand how it works.

Finally, know that money won’t just fall out of the sky without you putting in time and effort. So it pays to invest in improving your knowledge first so that you can make informed decisions and bets.

This article was first published on The Straits Times.