Most investors have probably been through a crisis before, yet how many can claim that they emerged unscathed? Though bull markets may last much longer than bear markets, the sharp losses experienced during the downturns can wipe out most or all of the gains experienced in the preceding bull market, and may also cause the investor to lose money overall. So how can we safely navigate through a crisis and bear market? Here are three simple but effective pieces of advice.
Focus on the business, not the share price
When share prices start to decline, we as investors may panic and sell to avoid seeing our losses grow larger. It is important to remember, however, that the aim of investing is to grow our money slowly and steadily by investing in great businesses over the long-term. Thus, the focus should be on a company’s business and how it is performing, and not its share price.
During a recession or crisis, it is normal for companies to experience a drop in sales and profits. But if a company is well-run and has a good competitive advantage, it could make use of the downturn to gain market share and thus emerge stronger once the recession or crisis ends. Remember to stay invested in companies with strong balance sheets and good ability to generate free cash flow, as such companies will be able to tide through prolonged recessions.
Keep cash handy
It is important to always keep some cash handy to be able to take advantage of severe mis-pricing and market dislocations during bear markets and/or recessions.
The reason is because we would not know how long or severe a market downturn would be, hence having cash available means that we will be able to continue to selectively invest in good companies over time. If we use up all our cash shortly after a downturn begins, we may find that we have no capital left to continue to average down should share prices decline further – this would end up being an opportunity cost.
Finally, we should avoid taking on debt. Though it may seem attractive to borrow in order to invest in shares which have gone down significantly, the fact that a downturn may be prolonged and prices may not have found a floor may give rise to financial distress. By borrowing, we are subjecting ourselves to potential margin calls – an event where we would have to cough up cash when share prices continue to decline after our purchase. This would negatively affect us both financially and psychologically. Therefore, leverage should be avoided.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.