Surviving a stock market meltdown: Dos and Don'ts

A woman looks at screens displaying, stock quotes, the Nikkei average and the Dollar to Yen exchange rate outside a brokerage in Tokyo on Aug 25, 2015.
A woman looks at screens displaying, stock quotes, the Nikkei average and the Dollar to Yen exchange rate outside a brokerage in Tokyo on Aug 25, 2015.PHOTO: REUTERS

SINGAPORE - China's "Black Monday" on Aug 24 sent investors stampeding out of markets across the globe, amid heightened fears over the world economy.

After stocks in China nosedived 8.5 per cent, the US benchmark index, the Dow Jones Industrial Average, plunged more than 1,000 points during trading - a never-before-seen drop - before losses were halved.

The Singapore market did not escape the global selloff, with the Straits Times Index sliding 4.3 per cent to log its worst single-day plunge in seven years.

But how should investors react when markets go tumbling? Here is a look at some do's and don'ts:

Don't panic

Giving in to panicked impulses and selling everything without much thought - while human - could be one of the worst mistakes an investor can make in a global selloff.

It can, for one thing, ruin you financially.

For the long-term investor, such a long-awaited correction as this does not mean that you should change your investment plan, said a Forbes report.

What matters most is not what happened yesterday, or even today, but what happens over the next 20 or 30 years.

Do, instead, have the courage to hold tight and ride it out

A Vox report noted that in the long run, the stock market has a pronounced tendency to go up, even as it exhibits a lot of day-to-day and even year-to-year instability.

"The key to making money as an ordinary investor is to ride out those highs and lows and take advantage of the beneficial long-term trend."

Analysts have also said they do not believe Asia is entering a new financial crisis, although the current downside risks may nevertheless persist for some time.

Do look for bargains, but don't buy blindly

Cullen Roche, founder of Orcam Financial Group, said: "The stock market is the only market where things go on sale and all the customers run out of the store."

Think instead of the current market downturn as an opportunity to snap up a stock that looks attractive but was too expensive.

Mr Matthew Frankel, a contributor at The Motley Fool investment advice portal, noted that during the 2008-2009 crash, investors were able to buy Google shares for as low as US$124 (US$644 today) and Starbucks for US$3.50 (US$53 today) and reap substantial returns today.

"None of these companies were ever in danger of going bankrupt, yet were trading at fire-sale prices just like the rest of the market," he said.

But rushing headlong into a buying frenzy with expectations for a rebound can be painful, according to a Forbes report.

In areas with fundamental problems, for instance, like energy, cheaper prices might not yet be cheap enough.

This means that buying now might mean having to stomach more losses before the skies clear.

Do take a look at the more defensive assets

A DBS Chief Investment Office report said that flight-to-safety sentiment among investors was notably seen in gold, which rose 4.1 per cent amid the recent spike in volatility. Gold spot prices stood at about US$1,153.66 as at 11am on Tuesday (Aug 25), up from its five-year low of US$1,085.03 earlier this month.

A separate report by Nomura listed some stocks it said could offer investors "good protection from index downsides", which included the Singapore banks, "given the very elevated short selling interest recently".

It also singled out Singtel and PT Telekom as the more resilient counters among telco stocks.

Sources: Vox, Forbes, DBS Chief Investment Office, Nomura, The Motley Fool