The end of the year draws nigh. It has been a roller-coaster year for investments. Are we at the brink of the next recession or do we still have a bit of bull to enjoy? Answers are as varied as the number of people you ask. In this issue, we explore strategies to take advantage of market volatility, regardless of which “expert” is right or wrong.
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How to Celebrate in a Market Crash – Strategies to take advantage of a bear market
Fix Your Psychology
It is a no-brainer that we should be investing (buying) when the price is low and selling when the price is high. However, most people do the opposite. In a market crash, we fear that our investments will depreciate further. When the price has been going up for some time, FOMO takes over and we enter at the brink of the next drop. The solution to this is to have a proven, time-tested strategy, and to stick with it regardless of how we feel. In this case, never trust your guts, use your head.
Think Long Term
We all know this one. However, how long is “Long Term”? Of course the experts would tell you the longer the better. Research has shown that if we are to invest in the MSCI World Index for 20-year periods since the start of the stock exchange, it is almost certain that we would profit every time. To make the most of the next two strategies, I would suggest a time frame of at least two economic cycles (two recessions and booms).Regular Portfolio Rebalancing
This is one proven, time-tested strategy to make use of market volatility to buy low and sell high. We need two sets of components – one relatively stable (e.g. Deposits, Bond Fund etc); we’ll call this “the Container”, the other more volatile that would surge during a bull run (e.g. stocks, Equity funds etc); this is our “Money-maker”. We then allocate an investment mix based on our risk preference (e.g. 30% Container 70% Money-maker). We would regularly (e.g. every 3 months) sell off and/or buy components to rebalance our portfolio back to our allocated investment mix. For example, in a bear market, our Money-maker would decrease in value. We’ll sell some of our Container and buy more of Money-maker so that our portfolio is rebalanced back. This means that we are buying into Money-maker when the price is relatively low (i.e. buy low). We keep increasing units of Money-maker in our portfolio during a bear market. When the market finally turns, we now have more Money-maker in our portfolio than allocated. We now sell Money-maker (take profit; i.e. sell high) and buy Container. In this way we make use of market volatility to “buy low” and take profit (“sell high”), without having to time the market. It would be even easier if we can automate this process.Conclusion
When we “Fix Our Psychology”, we won’t be tempted to buy and sell at the wrong times because of the FOMO. We understand that it takes “Time” for our investments to grow. Short term fluctuations would not worry us. Finally, we “Regularly Rebalance our Portfolio” to maximize gains and minimize losses. Thus with these three simple strategies, we can celebrate when the market crashes. We know that we're taking advantage of low prices and anticipating the return of the bull, to reap the rewards. Feel free to contact me if you’d like to implement the above steps in a structured portfolio.