If only we knew when those bears would roar. But, yesterday's bear-market hero may not survive the next downturn nearly as well. Today’s bull-market hero may get mauled in the future.
Here is some advice for all market situations.
- Trying to pick a single-entry point is easier said than done.
- Scott Keeley, financial adviser, Wakefield Partners.
Many investors will say that they are waiting for periods of extreme volatility to enter the market, but then when it occurs, they either get cold feet or prefer to hold until the market goes lower. This paralysis often means that investors miss the opportunity all together.
We have always preferred a ‘drip feeding’ strategy of investing—making small investments, and making them often, enables the investor to take advantage of the opportunities that market corrections create without trying to pick a single-entry point.
It is time in the market, not timing the market, that is the key to wealth creation.
How waiting for a market crash backfires
- Selloffs represent an opportunity to buy shares at lower prices, but caution is warranted.
- Mathew Hodge, director of equity research, Morningstar.
What might seem ‘cheap’ may be risky.
Consider the market price of the shares relative to the fair value estimate. And, whether a company has an economic moat, which will help sustain future earnings and fend off competition. If businesses don't have a competitive advantage, that means they are susceptible to competition or the vagaries of the market cycle. Their earnings are much more likely to go away without a moat.
A company whose competitive advantages Morningstar expects to last more than 20 years has a wide moat; one that can fend off their rivals for 10 years has a narrow moat; while a firm with either no advantage or one that we think will quickly dissipate has no moat.
What is a moat and how does it help an investor?
- You need to have a sound understanding of any company before investing.
- Jonathan Philpot, partner, HLB Mann Judd.
Know the market that it operates in, how big its market is and how competitive it is and understand how it has grown in the past and how this may look in the future. This can be very difficult to judge if unable to access research, but knowing a few stocks very well, and having an understanding of the value of the share, is a better approach than following too many stocks and not really having a great understanding of any.
It means that when market corrections occur and the share price falls, but the business itself has not changed in any way, investors can have more confidence that it is a good time to be purchasing these good quality companies.
7 pointers when averaging up on a stock
- If you keep your eyes on the horizon, the bumps on the road are easier to stomach.
- Sarah Newcomb, director of behavioural science, Morningstar.
As markets drop, investors need to fight off the urge to sell their shares and crystallise losses. It can be a rough ride. Scream if you have to, but you chose to be here. You’re going to feel like such a rock star when it’s over.
‘Fear’ sells. ‘Excitement’ buys.
So, rather than trying to turn off your emotions, focus on trying to channel that agitation into excitement about the buying opportunities down markets can bring.
In down markets, you can put your nervous energy into searching for assets that are selling at a discount relative to their fair market value. Understanding the difference between fundamental value estimates and market prices is essential to finding those quality companies that might be temporarily undervalued because of general market skittishness.
A solid long-term plan for your finances is very important. A professional opinion on how to organise your resources to reach your long-term goals can be a very powerful exercise, as well as a source of peace and security in the midst of volatility. If you keep your eyes on the horizon, the bumps in the road are easier to stomach.
3 ways to put the odds in your favour
- Focus your energies on things you can control and tune out what you can't.
- Christine Benz, director of personal finance, Morningstar.
Lower stock prices can be a positive development for those with a longer time horizon, because the same amount of money buys more securities than when stocks are scaling lofty heights. That is why younger investors, those in their 20s, 30s and 40s, benefit from having time on their side.
What's likely to be your main savings goal--retirement--is many years into the future. Based on the facts alone, market volatility shouldn't ruffle you that much because you have more than enough time for your investments to recover before you begin tapping them during retirement.
Should you get ruffled during volatile times, do this:
- Revisit your savings rates
- Review your long-term asset allocation
- Streamline and improve your investment choices
- Assess the adequacy of your safety net
- Make reasonable investments in your human capital
You hold no sway over the direction of the economy or the markets; they're going to do what they're going to do. But you do exert at least a modicum of influence over your own situation: how much you save versus spend, how you've allocated your portfolio, whether you've built an adequate cash cushion, and so on.
Don't try to time the market by switching to cash. Unless you know something we don't or are extremely lucky, you won't get rich playing the timing game. While the old "buy and hold" mantra may seem like cold comfort at times like this, rest assured that it has a better long-term record than market-timing.
Markets are marked by false bottoms (and ceilings)--points at which it appears that stocks won't fall (or rise) much further but then proceed to fall (or rise) even more. Anyone who tries to trick the bear (or the bull) by piling up cash will likely suffer less-than-perfect timing and miss out on big stock-market gains.
4 ways to control your investing narrative
- Your portfolio must have a stable anchor.
- Mahesh Mirpuri, mutual fund distributor.
If investors practice asset allocation, dips in the market won’t hurt. Volatility doesn’t feel good, but unless investors sell their shares at the bottom of the market, then a price drop won’t dent wealth over the longer term.
When markets are volatile and there has been a drawdown, it is the worst time to make a dash for safety or scramble for liquidity. You would be selling a loss. This will have financial and emotional repercussions. You can sidestep this by providing stable anchors to your portfolio. The way to do this is to have a well-thought out asset allocation plan in mind.
It provides insulation against volatility and makes the entire journey to your destination much smoother. This will keep you calm and objective during the inevitable volatility you will see in the equity part.
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.
All the above information has been sourced from these articles: