This article is written by Liyang, one of StocksCafe’s users, and also the owner of The Sloth Investor.
Black swans in the stock market are sudden, awful, unpredictable and extremely rare. The Covid-19 pandemic and Russia-Ukraine War are two good recent examples. Overnight, the stock prices fell tremendously. It’s only human to react strongly to these perceived threats, and many investors reacted by selling their stocks immediately.
However, is that the only surviving approach?
The Covid-19 pandemic upset the stock market but it eventually bounced back in a V-shaped recovery. Some investors successfully timed the market and doubled their net worth. Those who simply held and did nothing would have recovered their value prior to the dip. Yet, there were some who tried to time the market but ended up losing some capital as they did not enter the market when it was at its bottom.
What can we do to combat such panic reactions? Here are three strategies:
1. Remind yourself of the reason for the investment
Investors need to understand that the fundamentals of the companies do not change. When there is a global pandemic, a car manufacturer will not switch to making phones.
With this perspective, selling off that investment may not make sense. One should remind themselves what it was that convinced them to invest in that company in the first place. Instead of selling, one could consider it an opportunity to buy that company’s shares at a cheaper price.
2. Investing in a less volatile instrument
As the market was in turbulence, one can consider investing in a less volatile and risky option with the additional cash on hand. One of the ways is to reduce the stock composition and increase the bond percentage.
In Singapore, investors can invest in Singapore Savings Bonds (SSB). Not only is the capital guaranteed, the returns increase over time. In addition, the investor can redeem the bond at any time without a penalty. A diversified portfolio could serve as a “calming pill” during Black Swans.
3. Look at the big picture
Over the past 50 years, the US market has given an annual return of 10%. For sure there were periods of uncertainty. Remember the financial crisis a decade ago? Life goes on, markets recover, and investors who held and added more funds during that crisis emerged victorious. Let’s learn from them.
During the Covid-19 pandemic, there were times when my portfolio dropped more than 40%. The fundamentals of the companies remained, hence I did nothing. Not only did I gain back the 40%, my overall portfolio increased by 20% after the recovery.
Given the recent conflict between Russia and Ukraine and the rising inflation rates, I decided to do a Dollar-cost averaging (DCA) analysis. My portfolio experienced a -30% dip. Once the news of conflict resolution surfaced, my portfolio started to show positive gains.
Based on the data analysis and my personal experience, I will not follow the panic buys and sells. As the saying goes, “Time in the market beats timing the market”. Once investors acknowledge this, panic reactions to Black Swan events can be controlled.
Written by Li Yang
If you like what you have read, you can read more at Li Yang’s blog, The Sloth Investor. You can also register for a free StocksCafe trial account using his referral link if you’ve not tried StocksCafe!