If you are a loyal Singapore stock investor, you may have just lost 3 years of your investment gains in the past few weeks. Panic selling is an understatement of what is happening in the financial markets. With STI index fell to a three year low, it was reported by Bloomberg that the richest people in Asia have lost approximately $54 billion, which is one-fifth of their wealth in the past three months.
In the past week, It was Déjà vu to me. My anxious clients and readers started to ask if they should “react to the market” and cut down investment positions. It reminds me of four years ago during the euro debt crisis, when the world’s financial markets seemed to be collapsing.
What is happening in stock markets now? How to invest in a market crash like this? Should you buy more, sell more or do nothing?
In this post, I will give you three practical actions you can take in the current environment. These strategies are based on my years of investment advisory experience and for those who already have an investment portfolio.
Black Monday and the World stock markets sell-off
To be fair, Singapore was not the only stock market that crashed in the past month. There was no refuge in the world.
August 24 2015 becomes a historical highlight and it is called “Black Monday” now. On that single day, many stock markets around the globe have suffered the worst single-day drop since many years. Global investors have gone from complacency to near-panic. No matter where you have invested, you are likely to see red in your portfolio.
Chart 2 shows various stock markets performance in the past 2 years. It is easy to observe that US stock markets are still the best performing market. and Emerging stock markets were already on a downtrend even before the crash started. There is a reason for this and I will explain later.
What caused market turmoil?
The scapegoat was “awarded” to China when they initiated the currency devaluation of Chinese Yuan (CNY). CNY has depreciated 5% over a really short time frame.
It is probably hard for many people to comprehend why Chinese currency movement has such big influence to the stock market crash. To understand this, let’s look no further than our neighbour Malaysia.
Singaporeans have been flocking to buy Ringgit (RM) since the beginning of this year, so much so that the Ringgit was always sold out in money changers. You may say you change it because you will use it in Malaysia one day anyway, but it is reasonable to assume many people are “hoarding” extra RM as an “investment”.
Now think about foreigners like Singaporeans who have bought million-dollar Malaysia stocks, who have bought million-dollar Iskandar properties. What happens to them when RM had a free fall like below? When Singapore dollar to Malaysian Ringgit crossed 1:3, what will they end up with?
If you own an RM2.4m property in KL. It used to be worth S$1m 4 years ago, but it is only equivalent to S$800K today on currency movement along. If we factor in the crash of property price, you could easily lose 30% of your asset value.
Even if Malaysia stock market has dropped with a similar magnitude as the STI index. Malaysian local people and foreigners who invested in Malaysia have lost huge purchasing power by holding Ringgit. Such panic with the loss of confidence due to the recent political saga will just accelerate whatever financial instability and triggered the financial market to a downward spiral.
So now you could understand the depreciation of Yuan is not just another government policy. What makes Yuan special is that China has overtaken Japan and became the second-largest economy in the world now. With Yuan being fully convertible this year, the impact of CNY is as much as USD. The devaluation of CNY may trigger a currency war among emerging markets and Asian currencies.
If we go back to Chart 2 above, it is easy to understand why the emerging market has encountered much worst sell-off comparing to developed markets. In fact, Asian markets were left with the biggest monthly losses in more than three years.
Should you hold cash in a stock market crash?
Four years ago, when the euro debt crisis brought a few stock market crashes, I wrote a blog article “Is cash the king now“. I wanted to remind investors that cashing out in a stock market crash is the worst investment decision you can make. Fast forward four years, you can see that the global stock market has gone up nearly 50%.
I am not saying you should just buy and hold and pray a miracle will happen. With any crisis, it comes with opportunities. To seize the opportunities, you need to recognize two phenomena.
#1: Bull markets are often stronger than bear markets
Most of us understand market moves in cycles, but few can ride through the storms. Studies have shown that most of the time, the market will have a good run after a crash. The chart below tabulated 27 years study of Asia stock market.
From the chart you can see:
- The market correction is always severe and rapid like what is happening now
- Bull markets can start quickly and strongly, often immediately after market correction
- Bull markets tend to last longer, it is often periods of slower but sustainable growth. It normally posts gains for at least two years.
- Stock market recoveries tend to be uneven, it is hard to identify when best returns will happen.
The way stock markets run is like driving. We spend more of the time driving forward than reversing.
#2: Trying to stay out of the market and re-entry can hurt you badly
At any stock market crash, you may be tempted to “bottom-fishing”. You may think that you can sell the stocks now and buy back when the turmoil is over and the market is about to rise.
I have to admit that even myself were struggling with such temptation in the past. What I realize is that every market cycle has both up days and down days, it is often that a few very good days account for a large part of the total stock market return. Consistently predicting which days will move in which direction is extremely hard, if not impossible. If you try to time the exact day market recovers, it is very likely you will end up missing a few best performing days.
From Blackrock’s research below you can see, even if you miss just 5 of the best performing days, your total return over the years will lag nearly 40% compared to those who stay invested. Missing out two weeks in the market, you could end up with only 1/3 of what you are supposed to gain.
Missing the best performing day is as bad as buying at the top. Staying the course ensures investments will be ‘in’ the market on the good days.
What are the practical actions you can take
First of all, the stock market today is no longer just derived by the profitability of the underlying companies. A lot of times it is affected by stupid political “wayang shows”. Singapore had a stable economy but you should not just invest in Singapore stocks. It is what we called home country bias in behavioural finance. The stock market is too small to resist any external shock whether it comes from China or the USA.
Secondly, you need to recognize that there are opportunities amid market cycles. There were opportunities when oil price fall when China opened Shanghai-Hong Kong stock connect when Singapore properties are for mortgagee sale,
To ride through the market storm. You need to determine whether you invest for capital gain or for dividend income. As the Chinese saying,
You can’t have both fish and bear’s paw (“鱼与熊掌不可兼得”, You can’t have your cake and eat it too).
You have to focus on one investment objective.
Action #1: If you invest for the capital gain, optimize your portfolio
Most of the investment advice you received is always how to invest your money, in another word, what to buy or sell. The word Portfolio was often loosely used, if not totally ignored. If you hold 100% stocks, it is hard for you to manoeuvre.
You could factor the possible scenarios and you can just act according to the plan. Here is a simple example of a plan:
- Since I find no catalyst to trigger a global financial crisis, I will invest an additional 15% of my portfolio to the best 500 US companies through S&P 500 index fund
- If the global stock market continues to slide down 10%, I will allocate another 10% to this fund
- If the global stock market recovers rapidly and crosses the level before the recent correction, I will sit back and let the profit run.
- If after some time, the US market drops below its one-year average price again, I will sell the stocks and look for opportunities elsewhere.
You see, if you have a plan, you do not have to “react to the market”. You can average the entry point and improve the average costing of your investment portfolio, not going all-in at any point. Investing a few solid percents of the portfolio now is surely better than buying when the market is “toppish”.
Action #2: If you are income investor, do yield enhancement
I talked a lot about the importance of income investing. The beauty of income investing is that the stock market crash is nearly good news to you. Assuming your current income yield is 4%. A 10% short-term market correction will increase your yield to 4.44%.
I mentioned earlier that if you miss any of the best performing days, you will end up buying at a much high price which is detrimental to your yield. So it is time to pull out your shortlisted dividend stocks or funds and start to increase the holdings.
We all know that we should prepare an umbrella before it rains. That’s why I have always done most of my research first when market conditions are a lot more benign. If you choose to only start studying stocks or funds now, after the stock market crashed, you are going to have a tough job. Trying to familiarize yourselves with investment under turbulent stock market conditions is not only complex but an emotional challenge.
The most important thing for an income investor is to stay calm, ignore the market noises and focus on improving the portfolio yield.
Action #3: If you cannot sleep, reduce investment volatility
Having years of experiences through my investment advisory services, I started to accept that investment, though crucial to one’s financial future, is not for everybody at any given time.
If this is the first time you encounter such correction, or you invested your hard-earned money just before the Black Monday. Chances are that you cannot sleep well at night. But don’t worry, we have all been there. I am speaking from my own experience even if I thought I have done enough homework before putting my first dollar.
Such market environment gives you a good chance to take a step back and reflect
- If you were not clear about your investment objectives
- If you have taken a risk higher than your psychologically acceptable level
- If your portfolio was poorly designed and the drawdown was unexpected.
Reducing investment volatility does not mean holding cash and giving up investing. It is for you to get familiar with investing and test yourself out.
Imagine you have lost a few thousand dollars in Casino, the worst decision you can make is to “fight it back”. The best thing you could do now is to go home and take a shower. If you have lost money in the stock market and now sure why nor what to do, it is better for you to trim down your holdings and sharpen your sword before the next battle.
Remember the first time you took a roller coaster ride? You dragged yourself to the seat and you could hear your heartbeat. But after a few rounds, you will be just fine.
Learning from the past and positioning for the future
I hope this article has helped you understand better about how to invest in a stock market crash. Having said that, it is not an easy decision to be made.
When markets crash, investors buy, traders sell, speculators cut losses. – Ivan Guan
What are your investment strategies to weathering the uncertain market now? I would love to hear from you. Simply leave your comment below and let’s discuss.
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