What Should Investors Do In a Plunging Stock Market?

The following are some headlines I’ve seen from the Wall Street Journal this week:

Why China’s Market Fell So Much

China Stocks: Trading Called Off for Second Time This Week

”Dow Tumbles Nearly 400 Points on China Worries

If you’re a regular reader of the Wall Street Journal, you may find that many of the recent headlines are about stock market declines in the U.S., China, and other parts of the world that have taken hold in 2016. Stocks in Singapore have not been spared either as the market barometer, the Straits Times Index (SGX: STI), has fallen by 5.3% from the end of 2015 to Thursday.

This raises the question: What should investors do now given that stocks are falling hard?

I don’t think there is a one-size-fits-all answer. But, we can look at it in two different ways, one from the perspective of investors who are vested, and one from the vantage point of those who are waiting on the side-lines.

The committed ones

For investors who already have significant capital plonked into stocks, they may start to panic and question their strategy. That may be especially so for new investors.

If you’re fearful and panic-stricken, you may need to rethink your approach towards investing, since your panic may be driven by a lack of understanding of your strategy, or worse – a lack of strategy.

In any case, it might not be a good idea for you to sell your stocks just because they have fallen in price. Even the best long-term winners in the stock market can see their prices fall hard over the short-term. What is key here are the intrinsic values of the companies you’re invested in in relation to their stock prices – if you see the price/value relationship to be in your favour after careful analysis, it may not make sense to sell.

The uncommitted ones

There are some investors who, like myself, have let cash pile up while waiting on the side-lines to snatch up good bargains.

For us, a rational question to ask when the markets are falling will be whether we should invest all our cash in one go or break down our investments into a few chunks and invest across a wider spectrum of time?

I can tell you my answer: The latter will be my preference, since it provides the flexibility for me to average down should the market continue to decline.

In fact, my colleague Chong Ser Jing had showed yesterday that blue chip stocks here – such as Singapore Telecommunications Limited (SGX: Z74), Sembcop Industries Limited (SGX: U96), and Wilmar International Limited (SGX: F34) – have plenty of room to fall  “if the market’s mood were to be as sour [now] as it had been during the financial crisis [of 2007-09].”

But before you panic, I’d repeat what Ser Jing said about his study: “Bear in mind though that I’m not trying to make any predictions here – I’m merely letting history be a guide.”

Foolish Takeaway

As investors, we should make rational decisions and stick to our long-term investing plans to help increase our odds of achieving long-term investing success. And, do note the key words here: “rational” and “long-term.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.