When it looked like the sky was falling for the markets back in March 2020, do you remember what was your first reaction?
If your answer to the first question was “fear”, “panic” or any other associated synonyms, then you are normal. This feeling stems from our basic instinct of “flight or fight” when faced with precarious situations.
And what was your first decision that came to your mind after the reaction?
If your answer to this question was “liquidate”, “sell everything and run for the hills” or something like that, it is still normal. This is the feeling of “loss aversion”, where (according to studies) people prefer not to have losses than to have gains.
Imagine if you had carried out that decision, and looking at it retrospectively, what would be your immediate feeling and thoughts?
If your answer is “regret”, “I should have known” or something along that line, it is normal. This is called “seller remorse”, a feeling of regret and waste in selling off and you would have wished you did not do it earlier.
Looking back at the above answers, you would have noticed that it is normal to have such sentiments in our minds when presented with the questions. Being human, there is nothing wrong as we are naturally emotional creatures. However, from the investment and trading perspective, going with the flow of those same thoughts would bring more pain to your portfolio.
When one wanted to start investing, the typical advice would be to start reading up on material about things like equities, bonds, portfolio management, etc. However, after seeing some live examples around me, I would say the first thing to do is to prep one’s mind and emotions. It sounds easy but it is difficult to carry out as we have the tendency of not admitting our faults and over-estimate our abilities. Even if you think you have emotional control, when the actual crunch time comes, the original “you” will take over your supposedly calm “you”, since the former is your basic personality and character.
I admit there is no way one can completely switch from one emotional mode to another within a short moment (unless that person has a split personality or probably a robot instead), but we can reduce such emotive interferences in affecting our analysis and decision making. Here are a few tips you can use in bringing the rational “you” into the picture:
Tip #1 – Keep calm
Keeping calm is the very first thing you need to do when faced with news of a plunging market. Running around like Chicken Little does not help to alleviate the situation, and the situation itself is very much beyond your control, so there is no point fretting over. Investment is a long-term journey and plunges such as the one back in March 2020 are part and parcel of the market and economic cycles. Instead, take stock of the whole thing and look at the next tip.
Tip #2 – Think contrarian
Rather than viewing a down market with doom and gloom, why not see it as an opportunity to grab? In March 2020 (and also during 2008), almost all share prices were dragged down due to the fear and subsequent sell-out by investors who did not keep calm. It was also precisely at this moment that bargains were galore. However, it is also important to sieve out the good bargains from the bad, therefore some analysis and discretion is necessary to look for the right ones.
Tip #3 – Relook at money
Most of us love money, so much so that most people would attach a huge dose of emotions to it. Imagine the investment portfolio that was built up over time with your hard-earned savings, suddenly lost 10%, 20% or even 50% of its value; I could imagine the pain of the loss (hence the phenomenon of loss aversion). We have to train (and meditate to) ourselves that, once money had crossed into an investment portfolio, it becomes nothing more than a resource in your portfolio building journey. Move them around as if they are pieces on a chess board or units in a computer wargame, and deploy them wisely at the appropriate places and portions in your asset allocation.
Tip #4 – Remain diversified
Adopting a diversification strategy would save you some headaches as it remains a good hedge of protecting your portfolio. Though some said diversification dampens your overall returns (e.g., I gained 20% overall in a 100% equity-only portfolio as compared to just 10% returns from a mixed equity-bond one), it could also dampen your losses if you look the other way around. There will be a compromise between returns and risk, but I always advocated getting lesser returns than to have a greater risk, due to future uncertainties.
Tip #5 – Stay invested
As I had stated in Tip #1, investment is a long-term journey (at least 10 years in my definition). Do not let the poor market conditions scare you off from investing; good times and bad times, they are here to stay. Carry on with your strategy and style, learn from the markets and the economy and move on. Just like your school, work and personal lives, there will be ups and downs in investing. Strength is not all about winning, but also how you pick yourself up after a fall.
I hope the tips above would strengthen you mentally and be prepared for the roller-coaster ride that the markets bring us.