3 ways to maximize your investment returns during a market crash
On 24 Aug 2015, China experienced its “Black Monday” – in reference to the infamous 1987 global market crash. The Shanghai Composite fell 8.5% in one single day spreading panic around markets worldwide. Japan’s Nikkei and Hong Kong’s Hang Seng fell 5.9% and 5.2% respectively.
The sell-off continued when the European markets opened. The UK (-4.7%), Germany (-4.7%), France (-5.3%) and Italy (-6%) all saw their markets drop markedly. Finally, the Dow Jones Industrial fell 3.94% — its worst day in four years.
The U.S. and regional markets stabilized yesterday (25 Aug 2015) but the sell-off continued in China with the Shanghai Composite falling a further 7.6%.
When markets crash, there are two groups of people that react differently to the situation at hand:
- One group panics, fearful that markets are going to crash further, and starts to sell their stocks (sometimes at a huge loss).
- The other group, however, is excited about the crashing markets because they see the falling prices as a big opportunity to pick up great stocks at bargain basement prices. It’s like being a kid in a candy store – with the prices slashed in half.
So in times like these, it’s useful to remember a wise quote like this:
“Be fearful when others are greedy and greedy when others are fearful”
– Warren Buffett
However, just because stock prices are falling everywhere now, it doesn’t mean you go “all in” right now! It’s important that you practice sound portfolio management and add to your positions in stages. So let’s move on to…
3 ways to maximize your returns during a market crash
- Don’t view the market crash as a disaster but an opportunity to accumulate strong, fundamentally sound companies at bargain prices. To be honest, we’ve been sitting on 40% cash in our portfolio for a year now because we could not find any value in the regional markets except for Hong Kong (and if we can’t find worthwhile investments, we WAIT). It explains why the majority of our portfolio is invested in Hong Kong. But now, the current meltdown has presented numerous investment opportunities in the regional markets and we’re starting to shop…
- Be consistent with your position sizing. We like to give equal weight to each stock in our portfolio. For instance, if you plan to invest in ten stocks, each stocks should account for 10% of your total portfolio. If five of your stocks return 100% and the other five lose 50%, you still end up profitable. Investing is a “game” of probability and not every stock you pick will be a winner (though you can swing the odds deeply in your favour if you invest using a proven investment system). That’s why it’s important to diversify and weigh stocks equally, and never put ALL you money in just one company.
- Don’t be too excited to deploy your entire fund at one go! Always invest your money in stages during a market crash. Here’s how we do it for our fund: For example, if you plan to invest $100,000 in ABC stock, don’t go all in straightaway. Instead…
- Invest half of the amount first ($50,000)
- If the share price falls by another 20% (this is arbitrary. It can be 10-20% and is up to the individual investor), invest another 10% of the remaining amount ($50,000 x 10% = $5,000)
- If the share price falls by another 20%, invest another 20% of the remaining amount ($45,000 x 20% = $9,000)
- If the share price falls by another 20%, invest another 40% of the remaining amount ($36,000 x 40% = $14,400)
- And if the share price falls by another 20%, then invest all of the remaining amount ($21,600)
Doing this will allow to you get in at better and better prices if the stock continues to fall. No one likes to jump in too early with all your money only to see prices go even lower! On the other hand, if prices don’t fall as much, you still managed to invest at least half of your allocation at the very start. Of course, this is all based on the assumption that you’ve done your due diligence and you’re investing in a fundamentally sound company!
So as markets continue to be in turmoil and more stock opportunities surface, remember to keep your emotions in check (both fear and greed) and stick to a proper set of allocation rules to maximize your investment returns.