Over the past month, Alvin and myself have both written articles about the market downturn. I tried to explain from a psychological point of view why investors sell out during market crashes, while Alvin shared an excerpt of a newsletter we send to our members.
My wife was not very impressed though. She commented that these ideas we are discussing does nothing to help the retail investor weather the downturn. The man in the street needs something more concrete, something more tangible. They need clearer directions, she said.
Well, what the wife wants, the wife gets. #happywifehappylife. I have prepared a flowchart to help the retail investor with their thought process during these trying times. It is self explanatory, and it serves as a good fallback whenever you are in any form of doubt.
I will also elaborate further on some of the points in the charts below.
Let’s start with the easy parts first.
Assuming you are a newbie investor and you are looking to buy the first stock. Follow the flow chart down the path on the right.
If you are planning to buy stocks soon, the biggest question you need to ask yourself if whether you have spare cash. If you do not have a lump sum of spare cash to invest, consider a Regular Savings Plan that will help you invest as your save.
If you have no spare cash, DO NOT borrow to buy stocks. If you are planning to invest cash you will need in the near future (next week, next month or next year), DO NOT buy stocks.
To quote Benjamin Graham – ‘In the short run, the market is a voting machine. In the long run, the market is a weighing machine’. In buying undervalued stocks, we need to give the stocks time to realise their true potential.
While Warren Buffett likes to say that his holding period is ‘forever’, we recommend adopting a time horizon of at least five years.
Every time before you buy a stock, pause for a moment and ask yourself if you are willing and able to hold on to the stock for five years. Only if you are very certain of that, should you click the buy button.
If you are not the patient type but still want to be involved in the stock market, consider adopting a trading strategy. It is also important to take note of the potential pitfalls of traders.
Stocks are volatile creatures. When buying a stock, it is important that you are prepared for the stock to drop by half. If you are not able to stomach this volatility, DO NOT invest in stocks.
Consider instruments that are less volatile, such as bonds. Even better, consider building a Permanent Portfolio.
Time and Effort
Do you have time to monitor your portfolio? Active investing is a hobby. Stock picking is a hobby. As with all hobbies, it requires time and effort.
If you are not prepared to put in time and effort, it is better to consider pursuing a passive investing strategy instead. Investing in the STI ETF is one such strategy.
The importance of having a strategy you can abide to cannot be overstated.
Having a strategy gives us a framework and sets you in the right direction. It provides a set of criteria for us to evaluate stocks. It gives us a good reason to buy or not to buy a stock. A good strategy is robust and consistent.
Following tips from colleagues and relatives is NOT a strategy. Using your gut feel is NOT a strategy. Listening to the news is NOT a strategy. If you do not have a strategy, VIMC will provide you with one.
Easy part done, now let’s move on to the left side of the flow chart.
Assuming you have invested in stocks and you are spooked somewhat by the market downturn. Chances are you would have accumulated the stocks over a long period of time. You would have bought them under different circumstances and different market conditions. Some of them would have done well. Others not so well.
What should you do now? The biggest question is to ask yourself is – Does the reason why I bought the stock in the first place still stand?
If the answer is yes, congratulations – you have a keeper. If the answer is no, congratulations as well – all you need to do is to sell them off.
If you are like the majority and your answer to that is ‘I don’t know’, chances are you belong to the sell camp.
The flowchart provides a walk through of the investing thought processes. The steps involved require self awareness, willpower and conscientiousness. They sound simple, but they are not easy to apply.
I do hope that the chart is able to provide more grounding for your investment decision making.