A fresh selloff has just sent stocks to their fourth loss in five days (Thursday, 10 September). Many investors are now understandably nervous. With Singapore’s economy still on a nascent path of recovery, many are also bracing themselves for more volatility ahead.
If you’re worried about what the next few months could bring, here’s what to do now.
Keep your emotions in check
During market corrections, your emotions can often be your own worst enemy. Indeed, it takes restraint not to panic when markets plummet and sell your stocks at the bottom of the market. By selling low, you are essentially turning paper losses into real losses.
Letting yourself be affected by market fluctuations, no matter how severe, can lead to hasty investment decisions you may later come to regret. The best thing you can do for your portfolio in this period? Nothing at all. Ignore market fears and stay focused on your long-term investment goals. Better yet, resist the urge to check your portfolio daily. Watching your investments go up and down will only fill you with misery and worry.
Dollar cost averaging (DCA) is one way to help you take emotions out of your investing. By investing a consistent sum regularly – regardless of current market conditions – you eliminate the temptation to second-guess your investment strategy, or time the market.
Diversify your portfolio
Your portfolio should always be diversified. It is risky to have all your investments concentrated in just a few individual stocks or just one particular sector. For instance, many big tech stocks took a hit in the tech rout. At one point, Apple fell 8%, Tesla fell 9% and Zoom dropped 10%. If you’re significantly invested in any one of them, the drop would have dragged down your entire portfolio value.
Instead, make sure your investment portfolio is diversified across different asset classes (e.g. stocks, bonds, commodities etc), different sectors and different geographies. A straightforward way to achieve instant diversification would be to invest in Exchange Traded Funds (ETFs). Purchasing an ETF that tracks a broad market index like the S&P 500 gives you exposure to a basket of 500 large-cap US stocks rather than just a single company.
For a professionally-managed option, Syfe provides global ETF portfolios diversified across geographies, sectors, and asset classes for a small annual fee starting from 0.4% per annum. Real estate investment trusts (REITs) also help diversify your investments beyond stocks and bonds. A ready-made option is Syfe’s REIT+ portfolio, a diversified portfolio of quality Singapore REITs that tracks the SGX’s iEdge S-REIT 20 index and seeks to closely replicate its performance.
Commit to an emergency fund
A well-padded emergency fund is your next best defense. At minimum, your emergency fund should contain three to six months’ of expenses. Should you be laid off, you can still tap into your emergency fund to tide you over. This guideline generally works for younger investors who still have time to ride out the market downturn. For older investors on the cusp of retirement or already retired, they should aim to have cash reserves of at least two years’ worth of living expenses.
Setting aside an ample cash cushion for your sunset years protects your retirement nest egg. You can draw down your cash reserves without being forced to sell your investments at the market bottom. With some of your funds out of the market, it can also give your portfolio a chance to recover after the downturn.
Invest in yourself
Investing in yourself – whether getting your MBA or deepening your knowledge in your field or industry – is the best investment you can make. And a natural safeguard against turbulent markets.
As you bolster your expertise in a particular niche and make yourself more valuable, you don’t just increase your earnings potential. You are better positioned to stand out among other job candidates. So, devote time to reading extensively, attending seminars, or networking with like-minded people. Never stop learning and you will find that it pays off handsomely.
Think long term
A correction after such a strong market rally is undoubtedly scary, but remember, the markets always recover. It’s worth remembering that over any 20-year period, the US stock market has never lost money. The average annual return over a 20-year period stands at about 6.7%.
As a long-term investor, your best strategy to weather any economic turmoil is to stay invested and not panic. With the right asset allocation and mindset, you’ll not only survive a downturn but emerge wiser and more resilient than you were before.