Turning a crisis into an opportunity

IN early February 2018, investors around the world were thrown into a frenzy when global share markets tumbled overnight. The Dow Jones Industrial Average fell 8.2% over six trading days.

It dropped another 650 points on Feb 8, 2018, before closing 10.4% lower. The day after the US stock market fell by its largest amount in six years, Japan’s Nikkei index was down by 6.5% and Hong Kong’s Hang Seng was down more than 6%. At home, the FBM KLCI was not spared either, falling as much as 57.22 points, or 3.1%, wiping off a total of RM43bil in market capitalisation in just a day.

Not surprisingly, panic set in almost immediately with fears that a bear market was imminent. However, respite came when the markets rebounded after a short but intense period, indicating that the drop was in fact a market correction rather than a full blown crash. However, the impact of the market correction has set a new tone – that volatility is on the rise. Suddenly the bullish mood enjoyed over the past months has swung a 180 degree turn to reflect bearish sentiments. For many investors, such a scenario is a nightmare and crisis waiting to happen.

Investments are not exempted from Newton’s third law of motion; whatever goes up will come down eventually. Hence, investors should keep themselves grounded (no pun intended) and be prepared if a real crash were to happen.

When disaster strikes, it is not easy to keep a clear head because anxieties will be running high. Therefore rather than reacting to a crisis, it is better to insulate yourself against one while you have the chance to do so. I am going to share with you some strategies to “shock proof” yourself against potential market crashes so that you are ready to turn any crisis into an opportunity and emerge not only unscathed, but a gainer in every sense.

A market crisis opportunity toolkit:

> Know that history always repeats itself

Market corrections are not the Armageddon. There is no need to go on a panic selling spree over one incident if we know our facts well and keep calm. Throughout the course of history, stock markets have been crashing and growing post-recovery since the time of the Great Depression. From the Asian financial crisis in 1997 and the Dotcom crash of 2000 to the 2008 Global Financial Crisis, markets have picked themselves up and life went on. As 2017 saw relatively stable markets, there is the tendency to forget that markets rise and fall all the time.

> Set trigger points to buy

It is imperative that this is done prior to the crash so that when it happens, you do not go into panic mode. When the unexpected occurs, it is hard to think straight; therefore, predetermining your course of action upfront can save you unnecessary headaches and heartaches in future. For instance, if you want to buy into the US market, use Dow Jones Industrial Index or S&P 500 as a measurement. Likewise use KLCI for the Malaysia market. Your trigger point can be set at a 10%, 20%, or 30% and 40% drop. Tempting as it may be, do not wait for the market to drop by 40% before buying as the market may rebound after a 20% drop. In such a case, the investment potential that arose from the crisis may end up being a flash in the pan which you missed by not taking advantage of the opportunity that was right in front of you.

> Stagger your top up amounts to limit your risk

A common mistake made by many investors is to put in their top up investments all at one go in hopes of maximising gains. With this strategy, two things could happen. One, the investment goes up the next few days and you revel in your luck; or two, the price goes down even further the day after and you are left grinding your teeth in frustration and regret for not waiting.

Investing does not have to be an “all or nothing” decision. Logic tells us that we will probably never buy something at downright rock bottom nor sell something at the highest peak. That is why you can opt to stagger your entry so that you do not put all your money in the market at one go.

For example, if you have RM100,000 to top up your existing investments, split it into four portions of RM25,000 each and invest each portion according to the set trigger points. If your investment goes down then you can buy more of it at a lower price. This way, you get to average down your investment cost in order to make a higher gain once the market rebounds.

> Buy into a diversified investment asset

If you put all your money into a stock, it may not survive the crisis. For a successful investment strategy to work, the price of what you buy must recover. Consider instead, a unit trust fund that invests in 30 stocks; even if one or two stocks were to collapse, the other stocks can offset those losses and still give you profit. There is little chance that the entire fund portfolio will be wiped out by any single event, making diversified investment assets one of your best defences against a financial crisis.

Ideally, you should also be buying unit trust funds or exchange traded funds across the globe to make your portfolio more resilient as different regions may recover faster or slower during a financial crisis. Finally, choose only the best of breed funds (i.e. the consistently better performing funds in the similar investment asset class) to ensure strong recovery chances for your investment.

> Holding power

This refers to the ability to hold onto an investment for the long term in order to increase your odds of investing success. Greater holding power allows investors to tide over temporary setbacks in the market and wait for the market forces to turn back in favour of the investor.

In contrast, if an investor needs to monetise his investment in a hurry before it even has a chance to recover, when he sells he may make significantly less than he would if he had held on to it longer; or worse, he may even end up losing money.

The best way to boost your holding power is to make sure that the money you put into investments need not be called upon prema- turely. This is where your cash reserves come in, something that I cannot emphasise enough on. Cash reserves are integral to sound household budgeting; besides weathering any emergency expenses, you want to be able to get through an unexpected rough patch without having to touch your investment assets. The general rule of thumb for cash reserves is six months’ of your lifestyle funding needs for working individuals, or three years for retirees.

No investor is immune from the vagaries of the financial markets. It is the action (or inaction) he takes in the face of adversity that will determine the success of his investments.

Picture a scenario where the price of a share drops by 30%. Investor A, who did not read the strategies laid out in this article is caught off guard by the sudden drop and being unprepared for it, he spends the next few days trying to call his broker to discuss what to do next.

But before he can react, the market goes up again! Meanwhile, Investor B who has already set out his investment crisis strategy, proceeds to buy the share at 70% value, knowing that when it recovers to 100%, he will be making a 43% profit!

Many people out there are like Investor A, who wait for a crisis to make a killing but they fail to strike while the iron is hot and before they know it, the opportunity has come and gone. Without a strategy and plan in place before the crisis occurs, any action cannot be taken swiftly. The goal of hitting the jackpot remains nothing but a pipe dream.

Do not continue to bemoan your misfortune of missing the boat numerous times when others seem to have “good timing” and “good luck” with their investments if you do not take the little extra time and effort to be prepared. As author and life coach extraordinaire Tony Robbins puts it, “The meeting of preparation with opportunity generates the offspring we call luck.” Good hunting, everyone.