For many young investors, the current market corrections may seem like a fascinating experience. Some of them may view the volatile swings in the market as opportunities to make money from the stock market. This is not a flawed thinking but to mitigate the possibility of incurring heavy losses, it is important to avoid making three fatal mistakes commonly made by investors during bear market. Below are three lessons that I learned from the 1997’s Asia Financial Crisis and the 2008’s Great Financial Crisis.
Adopting the wrong strategy
Whilst it is true that when stock markets plunge, fear prevail and depress stock prices, thus presenting opportunities for bargain buys. But under such circumstances, I have learned that adopting a buy-and-hold strategy can be dangerous because you never know whether the stock counter can survive the storm. Instead, investors should be flexible and change strategy to momentum investing to exploit the fear sentiment in the market. This is where “contra” (buying and selling of stocks without forking out cash).
For example, during the crisis in 2008, I bought 100 lots of Mercator Lines and subsequently sold off my investments within two days, making about S$3500 of profits. It was not exactly a spectacular profit but then again, I made this amount of money within two days of trading and it was more than my monthly salary (back then I just started working for only a few years).
Subsequently, the stock tanked big time till this day because of the downturn in the shipping sector. The current stock price is even much lower than it was during the 2008 crisis! So investors of Mercator Lines who bought the stock during the crisis and hold it till today will be staring at massive losses (God bless them!)
Lack of holding power
If you want to fight a battle, make sure you have ample ammunition. Otherwise you will just be destroyed by your enemies. One of the biggest mistakes made by investors is that they don’t set aside an investment warchest and instead, use all their savings to invest in the stock market. So when the market turned against them, they don’t have the holding power to withstand the attacks. This is the major weakness among retail investors, who simply can’t match the deep wallets of the big boys.
To win the game, make sure that you do not need the monies which you are using for investments. For example if you are getting married, buying a new property or a new car, make sure there are separate funds to cater for these big ticket expenses.
Lack of diversification
Another Achilles’ Heel of investors is the lack of diversification across different asset classes. Thus it takes just one major stock market correction to destroy this category of retail investors. For the rich and wealthy, they knew the importance of spreading their risks across different assets like gold bullion, bonds and real estate. On the other hand, fringe players who failed to appreciate the importance of diversification often end up making huge losses in the stock market.
Therefore, if you are tempted to time the market, please have the discipline to allocate some portions of your portfolio in different assets. Don’t be greedy and just go for the kill.
SG Wealth Builder