How did you fare during the Chinese market correction? Hundreds of billions of dollars were wiped out in market value, and no doubt your portfolio took a beating too. Is your investment portfolio still down, even? Up?
After a volatile week that shaved 10% off the Dow Jones Industrial Average, investors are considering what they should do differently next time.
Financial advisors told investors to hold on for the long term because it is normal for markets to have pullbacks, corrections and crashes. In August, nothing felt normal. Your portfolio’s value was dropping and your net worth evaporating. A few months on, in hindsight, your investment advisors advice to take a long-term perspective and hold on is starting to make sense. Many stocks and indexes are still registering double digit declines but are steadily regaining their pre-correction values.
There are steps you can take to be better prepared and even predict the next downturn.
- Market Meltdown Tip #1: Do Not Panic
If you have made smart investments in good stocks with strong fundamentals, the price will come back. Some of the hardest hit stocks are now leading the rebound. Facebook lost 12.1% and Apple 10%. Google fell 6.5% while Microsoft was down 5.8%. These stocks make up one of the best performing exchange-traded funds (ETFs) in 2015 – the iShares S&P 500 Growth ETF, up more than 7% year to date.
- Market Meltdown Tip #2: Stick With the Fundamentals
If you have built a diversified portfolio with stocks that pass the value investing screens, and have settled for a reasonable but not toxic level of exposure to growth stocks, odds are your portfolio will rebound. If you have chosen a high growth investment strategy with no hedging, you may need to panic.
- Market Meltdown Tip #3: Monitor Technical Patterns
You do not need a sophisticated technical trading system to be aware of changes in larger market trends. Most online investment news sites provide sufficient technical tools. What trading patterns do you see viewing the stock history over a week, year, or five years? The Chinese crash followed a long bull market but before the crash, stocks began trading sideways. Short-term traders know that this pattern will eventually break out, either to the upside or downside.
- Market Meltdown Tip #4: Review Volatility Numbers
The CBOE Volatility Index experienced many choppy weeks in 2015. The currency markets were also more volatile than normal. If you had been regularly stress testing your own portfolio, you could have picked up on a higher level of volatility and risk. Try one of the free investment portfolio stress test calculators. More robust calculators may be available from your investment advisor and investment information websites for a small fee.
- Market Meltdown Tip #5: Follow Market Sentiment
Market Newsletters can be a valuable source of insight on market sentiment. Some of the leading newsletter writers have large followings because they have a good track record of predicting what will happen in the markets. Some newsletters are available for free, while many of the most respected pundits charge a fee. The Advisor’s Sentiment Report is a premium survey of over 100 newsletters. Put and Call ratios are a good way of understanding the forecasts on market direction of large investors. The Sentiment Indicator provides fairly technical analysis of market trends.
- Market Meltdown Tip #6: Watch the Commodities Market
China’s consumption of many commodities was slowing ahead of the market correction. Crude oil was trading below $40, a price not seen since 2009. Commodities traders started grumbling at the beginning of the year that the commodities supercycle led by Chinese demand was slowing down. Copper demand, which tracks China’s economic activity, was hit hard. Oil and steel were also experiencing demand slowdowns not seen in many years.
- Market Meltdown Tip #7: Track Corporate Profits
If you are investing in growing companies, you want to know what is behind the growth each quarter. Read earnings announcements. If something seems off, read the securities filings for more detail. If corporate earnings are down for more than three consecutive quarters, a fundamental problem in the economy is likely behind it. Start digging deeper to understand why companies are experiencing a slowdown in sales and profits. Corporate earnings were signalling trouble ahead of the 2002 Internet crash, but analysts who forewarned the market were a tiny voice in a market loudly hyping Internet stocks. Following the crash, a slew of companies had to restate corporate earnings.
Read: Exchange Traded Funds – Everything You Need To Know
- Market Meltdown Tip #8: Monitor the Broader Market
The missed signal on corporate profits in the early 2000s is a lesson to monitor the broader market, and not only the stocks in your portfolios. It is the big trends in the economy that will deliver the strongest warning of a potential correction. In hindsight, economists says the Internet crash was part of a bear market that started in 2000. No one would have known that we were in a bear market having read the news at the time. Instead, the media hyped a “new, new economy” and unprecedented wealth creation.
- Market Meltdown Tip #9: Watch for Tell-tale Signs
Not everyone was taken by surprise when Chinese equity prices plummeted. Investment pundits were warning for months of signs of a downturn in the media. Another way to pick up an early market signal is to check up on where the large institutional investors are putting their money.
Many of the world’s most successful investors are scrupulous in their performance of due diligence on companies. Incorporate some of these tips into your regular due diligence research.
A market correction is a good time to house clean and rebalance your portfolio. Look for opportunities to buy good companies that are selling below their intrinsic value. If you do decide to sell some stock, do not hesitate to reinvest the money back into your winners.
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