The Motley Fool

How to Keep Calm During Stock Market Corrections

The Straits Times Index  (SGX: ^STI) has been throwing some tantrums recently. This is evident from the close to 12% pullback we have seen in the last couple of months from its high in May. Is it now time for investors to panic or should investors be brave and take the opportunity to invest during these uncertain times? This is a tough question, but the answer is simple.

Market corrections also remind me of a famous quote made by John D Rockefeller, who is considered the wealthiest American of all time. He said, “The way to make money is when blood is running on the streets”. This quote cannot be further from the truth.

Each time the market corrects, investors are given a chance to buy a stake in a company of their choice at an attractive price. To make this move, investors need to stay calm and level-headed and not succumb to the fear and panic seen in the markets.

Here are some tips investors can follow to keep calm during stock market corrections:

1) Pick companies in an industry you understand. Buying a stake in a company within an industry you are well informed of can help reduce anxiety or fear. This is because you have a better understanding of the inner workings or business prospects of an industry to give you an edge over the common man on the street. This would give you the much-needed confidence in your stock as you are well-versed with the industry and company. After the purchase has been made, it becomes a game of patience.

2) Buy companies with strong balance sheets. One of the most important factors an investor needs to consider is the finances of the company, especially its balance sheet. A company with a strong balance sheet would be able to tide through harsh market conditions without any problems, and might even come out stronger after a market correction. This is because an economic crisis gives the firm an opportunity to buy up other smaller companies, further cementing its dominance in the industry.

3) Determine the price and don’t look back. This is the hardest thing to do as it goes against human nature in every fundamental way. One of the best ways, in my opinion, to prepare yourself during a market correction is to stop looking at the stock market, and that is what I do. Instead, I look at the company’s financials and determine a price that I would be willing to pay to buy the company’s stock. Once I have done this research and set the price, I place an order, and I don’t think twice about it. By doing this, it takes me away from the guessing game of when the markets are at the lowest, and helps me establish an investment position in companies I like.

As my colleague Chin Hui Leong mentioned in his article here, the Straits Times Index saw more than 10% falls from peak-to-trough in nine out of every 10 years. Each of these uncertain times provided investors with an opportunity to invest. What this means is that a market correction is not a rare event but are something investors should embrace.

The above three tips should provide investors with some ideas on how to navigate the uncertain times and stay calm, allowing them to “make money when blood is running on the street”.

Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.