3 Ways For You To Remain Rational During The Current Market Sell-Off
Over night, the S&P 500 and Dow Jones Industrial Average – major market indices for the US – fell by 3.3%, and 3.2%, respectively.
There is widespread contagion across Asian stock markets today. In Singapore, our Straits Times Index (SGX: ^STI) is currently down by 3.0% at the time of writing. Hong Kong stocks, as measured by the Hang Seng Index, has fallen by nearly 4%, while the Nikkei 225 in Japan has declined by over 4%.
Some investors are worried that more declines are on the way, and that a bear market has started. I have no clue as to whether stocks will continue falling, or will start bouncing up tomorrow. What I do know is that investors need to remain rational during the current sell-off – this is important if we want to avoid making silly mistakes, or better still, if we want to benefit from lower share prices.
But how can we remain rational when everyone else is losing their head? I have three ways.
Know that stocks are bound to fall from time to time
What goes up, must come down. Just as there are cycles in almost everything in life, there are also cycles in the market. In fact, if you are going to be investing for a long time, you are bound to experience many market corrections and bear markets along the way.
The good news is that stock prices have historically produced strong gains despite the presence of frequent corrections and bear markets. So, the only question here is when a bear market will happen, not if. As such, it’s important for us as investors to know what we own, and have confidence that the businesses of our shares have a high likelihood of continuing to do well over time.
For example, companies such as Singapore Telecommunications Limited (SGX: Z74) and DBS Group Holdings Ltd (SGX: D05) are likely to continue to earn profits during a stock market correction since people in Singapore and other parts of Asia still require telecommunications and banking services. The real risk here is that investors became fearful during a market correction and irrationally sell their shares in companies with strong businesses.
Knowing that market corrections are inevitable will allow us to maintain our cool during difficult times in the market. What’s more, investors might actually benefit from it if they do the right thing. This leads us to our next point below.
Have an action plan
Bear markets are a great time to buy shares cheaply. But to buy, we need to have an action plan which should cover questions such as: (1) Do you have a list of potential stocks to buy; (2) what prices do you want to buy these stocks at; and (3) how much to buy for each stock?
The bottom line is, having a plan will keep you focused on what matters: Buying good companies at good prices. It can also help you avoid being unnecessarily tripped up by your emotions. If you don’t have a plan yet, build one now!
Avoid looking at share prices
It’s very difficult for us to not get influenced by the second-to-second movement of the share prices in the companies we have invested in. This is especially true when the market is falling hard within a short period of time.
To help us remain rational, we should avoid fixing our attention on share prices. What we can do, instead, is to spend the time to study the businesses of companies. We can also use preset price-targets to initiate buy or sell orders – and of course, the orders should be aligned with our long-term investment plan.
The Foolish conclusion
The market falls from time to time. It is inevitable. Thus investors should make full use of a falling market to buy shares of good companies at bargain prices. And for those who are already fully vested, do remember this piece of sage advice: This too shall pass.