With the recent volatility in the market, it is a good time to review our strategies of how we are going to approach the market downturn which is part and parcel of investing. During the past few weeks, I have also received a few inquiries asking how I am going to approach the correction or potentially a bear market so I thought I will share it in this post. Please do note though that the strategy aforementioned is exclusively based on my preference and circumstances so it will differ from each person to the next.
I have previously mentioned in my post that having cash as part of the overall portfolio is a crucial part of investing. Even though they have relatively returned very poor returns in the past few years, it definitely beats using them to buy companies which are overvalued. Those who are guilty of doing so are probably realizing the pain of negative returns right now and have to wait for the next cycle to kick in to break even. Cash, in my view, offers a call option for investors to purchase companies at a compelling valuation when Mr. Market prices them incorrectly as they easily get moody at times. These are times when investors want to be greedy as the potential returns might come in double digit when market eventually recovers. Many are able to survive the downturn even with a fully invested portfolio but the opportunity loss will always be a miss.
With the latest STI currently at the 2,863 mark, we can finally say that the market is inexpensive relative to the long term average, though we can never discount the fact that cheap can always be cheaper. This is where you want to optimize your strategy to ensure that you opportune the most during these period of time when market presents you with an opportunity to realize these gains later on. For those who remains very conservative on the other end, it’s a matter of opportunity loss if you miss the downturn and it recovers later on as well. So it goes both ways.
My Strategy Approach
The below table is simply a quick rough guideline of how I am going to approach the market downturn specifically to using the warchest available.
This does not mean that I need the index to be fixed at 2800 before I am ready to use 20% of my warchest but they serve as a quick guide to remind myself not to get overly exposed when the index is consolidating. As always, my current strategy does not entail buying the STI ETF as I prefer to buy companies which are more compelling to suit my needs, so the focus will be on individual companies which met my criteria.
One more thing about the strategy (if you had noticed) will be that my funds will most likely be exhausted should the index breached the 2200 points and lower. This is a purposefully designated strategy for me as first I believe that the market already represents a compelling situation to take full advantage in regards to my long term strategy and secondly should the bear market plays out to be longer, my current active income and dividends received from investments should be able to provide a 1-2% funds available to further take advantage of the situation. Again, this is based on my assumption (and belief) that my job will continue to be secure and that none of these funds are money that are used for any emergency use.
You can see that it is no rocket and science here and this is how I will play out my strategy depending on how the market reacts, which is similar to what I have done successfully for the recent market correction in the past. The most important thing is to know your own comfort zone level, how much research you have done on the companies and how well you know about them.
Ultimately, it is your money, it is your decision. Try to stay away from the many “noises” from the public which deviates strongly from your strategy. They are as clueless as you are in trying to predict the market movement in the short run. So why trust them instead of your own ability?
What about you? How are you going to approach the market with your warchest should this plays out to be a bear market?
Hi B,
I like your strategy, it is easy to comprehend and straightforward.
One question, what if the market drop so fast that when you are working, you are not in time to deploy accordingly.
Or, our mind are always on the stock screens even when we are at work?
Hi Rolf
The nature of my work will allow me to tap on the market as and when it is allowed to do so. So i hv no.issue with that 🙂
or if market go upturn 3k, 3.5k..for long long time… when u deploy the cash…
If the market turns positive because earnings are.keeping up, then it is time to review the fundamentals again. But if they are up because of euphoria, then why would we want to.choosr after an overvalued stocks?
I second the fact that having a sizeable warchest is important at any one point. This was something that I had not fully prepared for and am looking to consolidate better in future.
Hi Paul
Warchest is as important as they are if we are able to deploy them purposefully. Some keep it forever so it is no doubt that it is losing its value a bit at a time.
Interesting plan. But if it never goes down, you'll continue sitting in cash?
Hi Lizardo
Ahh yes, if it keeps going up and earnings doesnt keep up then i rather stay in cash than chase after some ridiculous price.
Anyway, there is so much you can do now with the cash. There are a few corporate bonds fcl cmt and ssb offering pretty enticing yields allowing you to wait.
Like me. Money is rotting for years as war chest. LOL!
Hi Uncle CW
That is why you can make double digit cagr beating other funds manager. When is round 56? 😉
Hi B,
As the market improves are you planning to sell on the way up, booking your profits and rebuilding your warchest or continue holding on to the shares until the market has become way overpriced?
Hi Some Ideas
My answer would have to go back down to the valuations. If there are overvalued then yes but if earnings are keeping up, then the holding period should be forever. 🙂
This is a good guide to follow also in my opinion :http://www.fool.com/investing/general/2013/08/19/what-i-plan-to-do-when-the-market-crashes.aspx
Hi RK
Thanks for sharing the link.
I guess it boils down to individual investor's preference at the end of the day.
One thing I don't really like about what the author in the article did was that the utilization of cash in market downturn are in a down pyramid, so it gets bigger as the correction turns bigger. But as we can see from the statistics, the big down market happens once or twice in a century so I definitely not want to place a high amount right down there when things could have not happened in my lifetime. But again, personal preference.
HI B,
I think you've mistaken. The amount allocated is not down pyramid. It is allocated peak when the market falls 20% and subsequently it goes down after that.
Aint current valuations already attractive?
What if sti never goes below 2800 but instread goes on a uptrend?
Hi Felix
Market is inexpensive but I don't find them compelling enough to go all in at the moment. Again, personal preference on this matter. There's no one right thoughts on these matters.
On the other hand, what if market goes on a downtrend from here? It's all down to "if" scenarios. We just have to be prepared what comes next regardless of what happens.
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