It’s been a turbulent two weeks for the stock market. And that is an understatement.
It has been more than two months since the news of Covid-19 surfaced. The reality of the virus’ impact is starting to sink in.
From the epicentre in Wuhan, China, the Covid-19 outbreak has now morphed into a global crisis. It has led to the cancellation of flights, grounding of cruise ships, the imposition of travel curbs and the quarantine of vast numbers of people.
And to add insult to injury, this week has seen an oil price crash, with prices tumbling 30% in one day due to a price war. This phenomenon hasn’t happened since 1991.
In response, the Straits Times Index (SGX: ^STI) has edged ever closer to a bear market, with it being down close to 19% from its peak back in 2018. The Dow Jones Industrial Average (INDEXDJX: .DJI) and S&P 500 Index (INDEXSP: .INX) have seen similar falls and now stand at the brink of a bear market.
[Editor’s update: as of Thursday, the Dow Jones has declined more than 20%]
And if a bear market arrives, how should you react in the days or weeks to come?
Control your fear
As Yoda quips in Star Wars — fear is the path to the dark side.
And the dark side, in this case, is selling out your entire portfolio in panic.
Plunging share prices are upsetting. It impacts our wealth directly.
But it’s important to put things in perspective.
You ask yourself — will this storm eventually pass and will the world be able to recover?
If the answer is “yes”, then it’s something your mind can latch on to for assurance.
Second, do a review of your investments to see if they can weather the storm without being permanently impacted. Short-term revenue and profit declines are normal in the course of business and should be accepted as the risk one has to bear while investing.
By mastering your fear, you will no longer be subject to panic and anxiety should share prices fall even further.
But fear is only one side of the equation. There is also greed.
Hold back your greed
On the flip side, some investors may get too greedy during a bear market.
Seeing bargains and deep discounts everywhere, they start going on an uncontrolled buying spree.
Just as fear should be controlled, greed should also be tempered. Once a bear market hits, there will be bargains galore, but you don’t need to own everything cheap.
It’s important to be selective and to choose your investment picks carefully. Being indiscriminate in your buying implies a lack of control and may result in a portfolio of mediocre companies.
Instead, investors should carefully plan to buy companies that they are comfortable and familiar with. This strategy ensures that you don’t go crazy when prices take a tumble.
Take your time
A third important thing to remember should a bear market hit is to invest slowly and steadily.
We will not know how long the problems will last.
Neither does anyone else, for that matter.
So, when you can spare a bit of cash, deploy it to buy stocks that have been beaten down. Over time, as the recovery takes place, these purchases will stand you in good stead.
But, remember that in the short-term, cheap-looking stocks can become cheaper.
So, you need to be mentally prepared for short-term paper losses.
Investing is a marathon and not a sprint. The end goal is to be able to build and grow wealth over years, even decades.
A few months of poor performance should not detract you from that.
Get Smart: Be comfortable with the unknown
During tough times, it may be difficult to tolerate uncertainty and volatility.
But as investors, we need to get comfortable with dealing with the unknown. Because when there’s uncertainty, it also creates opportunities for the buyer of long-term values.
So, be aware of your own fear and greed during a bear market. Keep both in check.
And remember to deploy your money slowly, and you should turn out just fine.
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Disclaimer: Royston Yang does not own shares in any of the securities mentioned.