It might be distressing to watch the value of your money steadily decrease each day when the stock market is in upheaval and your investments are in the red. It can push you into action you might not have taken otherwise.
Long-term investment entails the risk of losing money as well as gaining money in the stock market. The challenge for investors is to find a way to ride out the market’s ups and downs without letting them affect their quality of life.
When your investing portfolio drops by double digits, the first thing you shouldn’t do is freak out. Don’t give in to your emotions because doing so will almost certainly lead you to make poor choices. Instead, relax, block out the noise of the market, and think about the following.
1. First, you should check if rebalancing your investments is necessary
Assess your portfolio strategically instead of reacting emotionally when making a sale. Is your portfolio spread out across a variety of asset types, industries, and regions? Although long-term government bonds and gold have held their value or even increased throughout the current health crisis, equities have lost value. You will be in a lot stronger position if your portfolio is well diversified compared to less diverse ones.
Similarly, your portfolio’s performance may suffer in comparison to that of someone whose portfolio is widely diversified across business sectors if it is only exposed to global tourism- or hospitality-related funds and fixed income.
One option is to rebalance your investment holdings. Since bond prices have risen and stock prices have fallen, your asset allocation may not be where you want it to be. If you believe this is a good time to diversify your equity holdings, you may want to consider selling some of your larger winning bonds.
You can avoid unintended, excessive exposure to one or more asset groups by doing periodic portfolio rebalancing.
2. Cut back on your holdings of shady stocks
It’s possible that some of you have invested in certain equities rather than a diversified portfolio. If that’s the case, maybe you should reevaluate your stock holdings and get out of some of the lower-quality companies.
These are, alas, the stocks that have probably suffered the most from the market fall. These businesses, which are often characterized by excessive debt and inadequate cash flow creation, may not be able to weather the present global health pandemic, especially if it persists for a longer length of time.
It may be more smart to accept reality and cut your losses on these companies than to hope for a miraculous revival. Profit on the market’s current cheap pricing for high-quality stocks by investing in those companies using your savings or the money you receive from selling less desirable equities. You can also put your money to better use during these periods by investing in a well-diversified equities fund.
3. Be prepared with a "shopping" list
Famously said by then-White House Chief of Staff and current Chicago mayor Rahm Emanuel during the Great Financial Crisis (GFC), “Never let a good crisis go to waste” encourages investors to look past the immediate loss of portfolio value and take advantage of quality companies selling at a discount.
Strong competitive advantage and a healthy balance sheet give blue chip companies a better chance of weathering economic storms. They can benefit from their competitors’ inability to continue operations due to their debt loads, gain an advantage over them in the race for top talent, and fortify their business on the back of lower interest rates and government support, and emerge as an even stronger company as a result.
As was previously noted, navigating a severe downturn can be very unnerving, which might cause you to make poor investing judgments. Having a “shopping” list of potential stock investments might help you narrow down your options and make more informed decisions. You may do the same thing with equity funds, which invest in a wide range of stocks.
To achieve long-term capital growth, for instance, a diversified portfolio of SGX-listed firms is a suitable choice.