A Storm is Coming! What to do in a Market Correction.

Over this weekend, I got quite a lot of messages asking similar questions,

“What should I do with shares? Is it going to be like 2008?”

I am sure many of you out there might be thinking the same as well.

I did plan to write about market correction before I started this blog a month ago, it’s not because I have a crystal ball, but statistically speaking, we are long overdue for a market correction. As an investor, we should prepare ourselves both mentally and financially for it.

“A Storm is coming! Take Heart Young One, the Earth Mother is Near.”

1529px-Cairne_Bloodhoof_fullFor those that played a lot of Warcraft 3 game, you might be familiar with these Cairne Bloodhoof quotes, when you are commanding your orc troops around.

Last Friday 21 Aug 2015, from the market high, the US benchmark S&P 500 is 8% down, the Dow is 10% down, The UK FTSE 100 is 13% down.

Today the Australia, Asia markets continues the downward trend.

You get the idea, a storm is coming! What should you do?

Be calm, take a deep breath and Celebrate of course! Why is that?

article-2078597-0F4609F500000578-670_634x372It’s Sales season. The financial market is not On Sale that often, so when it comes, you should shop for a bargain.

The average market correction of 10% decline is roughly once a year. Although the average frequency is once a year, it does not need to happen every year, in fact, the last 10% decline was October 2011. So the stock market have been stingy and not giving us a good Sales for some time.

It might even give us a better sale, maybe 20% or more considering it’s been a long while since the last sale.

So would it be like 2008? I don’t know but as a long term investor, I hope it would be.

But why do people panic when there is a big market drop?

There could be plenty of reasons, some of them are:

  • Gambling by overleveraging
  • Trying to outsmart the market by cashing out and trying to buy back when it is lower (It usually never works, unless you have a working crystal ball)
  • Investing with money that is needed in the short term
  • Don’t like to lose money (it’s only a lost when you actually sell the stock)

As a long term investor, you should be like the shoppers in the Sale photo above. Rush in to hunt for good bargains. There’s a lot of good data which proves when you continue to invest like normal during a market crash, that is how you would maximise the return such as this and this.

This is due to every market crash, there would be a recovery. If you only start buying when the recovery has started, you would have missed out the initial gains.

It’s easy to feel like you have failed if you buy a company at $100 and it falls further. As an investor, you should measure your result based on the next 5 years, not the next 5 days. It would be virtually impossible to predict and buy at the very bottom, therefore I would recommend continue with regular investing to build your Avalanche of Financial Freedom.

If a very nice shirt that cost $100 is on Sale and is now selling for $80, do you see people rushing in and say, 

“I bought this shirt last week, it is brand new, let me sell it back to you at $70.”

No, you don’t, but it’s funny that you see this in the stock market.

A famous Warren Buffet quote:

“Be Greedy When Others are Fearful.”

So I would recommend you go up to the guy that is selling his brand new shirt and say,

“Let me buy your brand new shirt for $70! Do you have more that I could have?”

 So when the storm comes, take a deep breath, enjoy the breeze and Happy shopping!

If you have missed my first shared trade, I shared a company that I am buying. It is a good and stable company that could steadily compound your returns over time.

What would you do if the market drops by 50%?

6 thoughts on “A Storm is Coming! What to do in a Market Correction.”

  1. BE GREEDY AND BUY MORE WHEN OTHERS ARE FEARFUL. i still do not understand the oppurtunity message behind it. It is always nice to buy shares when they are low and the profit margin will be bigger when it goes back up. I am sure everyone is doing the same thing. I think WBUFFET is trying to tell us to buy when others are selling. If everyone is selling thats a clear sign something is wrong! For Example: GOPRO is down in the ditch. everyone is selling, its lower than its IPO. I wouldnt go there. It would be gambling and i am sure WBUFFET wouldnt buy GoPro shares too. So that statement doesnt stand.

    Twitter is also very low. However not many are selling cause they are still many fanboys holding on, menaing others are NOT fearful yet. How to be greedy?

  2. @The shopaholic @kwws
    Ye that can be easily done. I do that sometimes too. That’s why writing this blog gives me time to remind myself the Right way of investing.
    The market swing is partly affected by human psychology after all. When it’s the good time, greed makes more people invest and vice versa.

    I would always keep a portion of my portfolio in cash, just to take advantage of moments like this.

  3. Hi Daniel, I hope you are well. Long time no speak! Looks like it’s been 4 years.

    Anyway, I have been silently reading your blog and I have a question on your latest entry re:storm.

    I share the same view as you, that it’s sale season right now. However, my question is specifically on big oil companies. I am quite exposed to oil, and oil as we know, has been on never ending further discount over the past couple of months. what is your take on oil now? Buy more? or wait a while and buy more?

    1. Hey Shen, thanks for reading and leaving a comment here 😉

      It’s a good question. Please note that I work in the energy industry, so my views can be biased.

      But let me start with portfolio allocation, you mentioned that you are quite exposed to oil. If you are already heavy on oil, I would suggest holding on your position or even considering selling although it is not the best time. It depends on the allocation you are comfortable with. You are young, so if it was me, I would just hold it.

      As for my take on oil, I am bullish on it. We still need to use energy for our everyday life. Renewable is growing no doubt, but it would take time to disrupt the oil industry. If I am looking for the next 5 years, I would have some oil companies in my portfolio.

      Whether it is buying now or later, it depends.. I am really exposed to oil due to my work. So I would only buy when it’s really really cheap. If on the other hand, if I have no exposure, I would consider buying as the valuation is pretty attractive compare to historical terms for obvious reason.

      If you buy company X at $100 or $70. Obviously it would be better to get at $70. But 5 years time, if the price including dividends is $200. I would rather have exposure in that company than not at all.

      Hope that helps.

  4. the dilemma about investing: when you’re at the right moment to shop aka market correction, you don’t have sufficient funds ; but when you do have, the market is overbought :S

  5. Ditto all the above. It’s certainly time to go shopping. But only if, one has the funds. No one likes to lose out on bargains. That’s another reason why some people panic when market fall – they see bargains but they can’t buy, for there is no dry powder left!

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