A market downturn can be scary. In the past few months, we have seen one of the most volatile swings in stock market history that can unnerve even the steeliest investor. But many forget that we have been through this before.
Whether it is selective memory or a case of financial amnesia, many investors might give in to their worst instincts which often leads to poor investment decisions. Here are five common investing mistakes to avoid that could set you back even further in a downturn.
1. Panic Sell
It can be painful to see a sea of red in your portfolio. But giving in to fear and panic selling would only crystallise your losses and making them permanent. Instead, take a long-term view of your portfolio by realising that markets move in cycles and that downturns are temporary.
History shows that each bull cycle tends to end higher than the previous top. For example, during the 2008 crisis, global markets plummeted as the subprime meltdown spread carnage around risk assets. However, the markets found its bottom in March 2009 and eventually recovered to former levels and goes even higher.
More recently in March 2020, stock markets cratered as the COVID pandemic shuttered the global economy with the MSCI World Index plunging by 34% in a span of 6 weeks. However, the recovery was equally swift with benchmark gauges retracing back their losses in April and notching new highs since then.
2. Trying to Time the Market
Another common mistake is that investors may attempt to time the bottom by selling entirely and then piling back in when markets start to rebound. Unfortunately, investors even professional ones rarely get both the timing right and ended up in a far worse position than they were before.
Instead, practice dollar-cost averaging by continuously investing in fixed sums through regular intervals. This helps lower the purchase price of your investments over time by taking advantage of market dips as well as reducing the risk of bad timing or investing according to one’s emotions.
3. Did Not Rebalance
Investors are advised to rebalance their asset allocation at least twice a month to correct portfolio drifts back to its target allocation. However, a major market movement such as a downturn could also throw it off balance.
In a downturn, the returns from an equity portfolio would tend to fall much more than the target allocation as global stocks are down. Jittery investors may neglect to rebalance it back and increase their exposure in equities because they are worried of the volatility in the markets. After all, it sounds counterintuitive to invest when market conditions are shaky.
However, it is important to do so in order to stay on track towards achieving your long-term goals. Rebalancing is also important to ensure that you are taking the desired level of risk that you have set out in your investment plan.
4. Cutting Your Winners and Hanging on to Your Losers
An important investment maxim is to ‘ride your winners and cut your losers’ from your portfolio. It sounds logical, but during a downturn, investors tend to do the opposite as they attempt to stem losses. Thus, they lock-in gains from their winners in order to compensate for losses in other areas of the portfolio.
But this only digs a deeper hole for the investor who could be worse-off in the future by hanging on to the portfolio’s losers. Instead, establish clear parameters for corrective action where needed in your investment plan to avoid mistakes such as these.
5. Monitoring and Doing Too Much
In a downturn, investors are often plugged-in to news alerts and social media to keep up-to-date with what is going on with the markets. This could prompt investors to buy, sell and sometimes even take advice from unscrupulous ‘financial gurus’ with a hidden agenda.
Looking at your portfolio 24/7 and tinkering with it too much does not usually end well for the investor. Financial anxieties kick-in and you start to lose sight of your goals which includes why you have decided to invest in the first place.
Learn to filter out the noise and take every sensational headline with a pinch of salt. Media outlets rely on eyeballs for advertising revenues and clickbait articles are their go-to tactic.
Instead, stick to your investment plan through regular contributions and practice diversification. Ensure that your portfolio is geared towards it stated purpose with an asset allocation that matches your risk tolerance.
The first rule in any market downturn is to stay calm. We may not always be in control of any given situation, but we can control how we respond to it.
This is especially true for investing where success has little to do with how much you know, but rather how you behave. Thankfully, it mostly involves inaction, staying the course and lots of patience.
About the Author
Lee Sheung Un is a communications officer at Affin Hwang Asset Management. A millennial, he is still finding that balance between wealth, freedom and purpose. Views expressed are his own.