The month of August has been a deadly month for share investors thus far. In the US, the Dow Jones Industrial Average has dropped more than 4% since of the month and just dipped below the 17,000 mark. Similarly in Singapore, the STI index fared no better, having dropped more than 7% since the start of August. Global uncertainty prevails with oil prices at multi year lows, the recent devaluation of the Chinese Yuan and the impending fed interest rate hike. In this kind of situation, how should an investor react?
Cash is King
The key theme that investors need to take heed of is capital preservation. Cash is king in this environment. The first thing you need to do is to take a look at your portfolio. Identify the stocks with poor fundamentals and are the most speculative. Chances are, these are the stocks that will drop the most during a bear market. Whenever you buy these stocks, it is always prudent to have a stop loss mentality to cut your losses fast before they compound. Even if you have not sold them earlier when you should have, you should immediately cut these stocks off as soon as you can before the losses become even heavier. Never hope for a rebound as stocks with poor fundamentals have the least chance to recover. In the event that it really recovers in the future, you can always re-enter again at a lower price, which still puts you in a better position than if you had held in all the way.
Do Not Average Down Too Quickly
For stocks with good or better fundamentals, such as your blue chips, the common mentality is to average down during a bear market. While this concept is fundamentally sound, the key here is make sure that you identify these stocks correctly. If not, you could be averaging down on a loser which will never recover and hence put you in an even worse position. In terms of the timing of when to average down, I would suggest to not average down in a hurry as your capital might end up being stuck as the stock continues to descend. Wait for signs that the market is bottoming such as prices going sideways for a while or a strong rebound for an entire week.
The best time to make your money in the stock market is when the market comes out of a recession and forms a bull run. That is the time when a larger capital will greater benefit you and result in significant profits. Hence, it is prudent not to lock your money in bad stocks that will not recover or average down too quickly resulting in little capital to take advantage of the recovery. Always remember – Hold more cash during a bear cycle so that you can benefit more when the market recovers.