Tuesday, August 25, 2015

What to do in this market downturn ?

Yesterday, everyone seemed to be having a reaction when the STI started on a free-fall which led it being 4% down.

Some of the folks had a "I told you so" episode, brazenly declaring that they have won because the market bear is upon us which is stupid because a savvy investor knows that bull markets don't last forever.

A least one person I know even went as far to declare that the Chinese Yuan would depreciate 10% and that this downturn was just the beginning. I checked into Yahoo finance, a 10% depreciation would mean that the USDRMB would be at the at the 6.82 territory. We are nowhere near that territory as of the moment so I would believe the markets only when I see it.

I attribute the feeling of triumph to the fact that the person probably has little skin the markets.  Even a broken clock is right twice a day.

Some of the other folks are openly panicking, some were sitting on paper losses and they were thinking about the opportunity costs of these losses. I lost about $40k+ over one trading session on Black Monday. That's half my school fees for my entire JD course. Even so, I don't have much to complain about : Buffett and gang probably lost even more. The beauty of investing is not that you have money to make, but that everyone has the opportunity to make losses. Losses means that sometimes, fear will strike the market and the result is a moment of truth when true wealth can be generated by buying bargains and holding them for generations to come.

This article is written for some of calmer folks asked me whether it was time to get back into the markets.

I think these folks are on the right track : Times like these are the best times to get into the markets and start investing.

As to what the market would do next is something which is beyond me. I would advise the reader not to believe anyone who claims to be an expert. For matters involving China the only true experts are those who study the CCP. The periodical of choice is not The Edge or The Business Times. You are best off reading the Economist for hints (I've already combed the most recent copy and got none the wiser).

Here's a strategy which I think is a reasonable one based on the ignorance of all parties including myself :

a) Split your war-chest into many parts.

Since no one knows what will happen next. It would be unwise to invest all you money in one go. The wise would consider the possibility that they are very likely to catch a falling knife if they invest tomorrow. So the prudent thing to do is to buy something with 5% of your war-chest if you make the decision to enter tomorrow.

b) Know the typical duration of recessions.

Several facts would be useful to understand how long a downturn would last. The Great Recession of 2009 lasted 18 months. Other recessions lasted about 8-16 months prior to Great Recession. The duration of economic cycles tends to be getting shorter so it is reasonable to assume that whatever we are experiencing would not last longer than one and a half years.

c) Time your market plays

Once you decide to make a move, starting thinking about what frequency would you inject into the markets. For example, you can split your war-chest into 6 parts and invest tomorrow and then every 3 months thereafter. Somebody else may split the war-chest into 18 parts and invest once a month.

This is the only way to avoid being cut by a falling knife.

d) Invest based on good market fundamentals

I can't recommend which stocks to get into at the moment because if I could, I should be managing a hedge fund and not writing a financial blog.

You may refer to other financial bloggers who are much savvier investors. What I do know is that this strategy is better for fundamental investors.

You need to decide on a theme for your investments. You may determine that you want a strategy to buy blue chips, deep value stocks, or growth stocks. A beginner should buy the STI index if they do not know which stocks to buy.

As for me, I will be bargain hunting high yield counters which give at least 8%.

In summary, at least for dividends investors, this is a great time to buy stocks. I will not be surprised that in the short term, we will experience a nastier downturn but we can collect cash from our investments until the markets recover.

As I have fees to pay in October, I am committing this round of dividends to completing all payments to SMU, thereafter, I will be farming about $2,000- $3,000 into the markets until I start my training contract in 2017.


Impossible Bird said...

Good article!

Christopher Ng Wai Chung said...

Thanks !

Moving forward I will try convert the queries of my readers into full fledged articles.