Last Wednesday, there was a stock market correction. The Dow Jones Industrial Average closed after dropping more than 800 points. After Thursday, the Dow closed at a 1300 points loss in 2 days. The S&P 500 has lost about 6% in two days, dropping below their 200-day moving average for the first time since April. The worst has to be the NASDAQ Composite, which lost more than 10% at one point in time on Thursday, bringing NASDAQ into correction territory. Has the old bull finally retired himself for a life in the meadows? Has the young bear grown its paws ready for a powerful swipe?
What is the difference between a market correction and a market crash?
By definition, a market correction is at least 10% drop from the high. A market crash is a sudden dramatic drop in stock price of at least 20-25%. According to investment bank Deutsche Bank, there is a market correction every 357 days on average. Whenever there are market corrections, sensational news like these flashed across our news feed.
Articles predicting market crash have been aplenty in recent years due to our seemingly everlasting bull market. The previous stock market crash, the great recession, was caused by the subprime mortgage crisis which eventually led to the failure of many reputable banks which cascaded into the failure of many other companies.
When will the current bull market ends? I don’t know. Is the crash here already? I don’t know. I choose not to speculate but instead to look at facts and respond with logic.
With credit to our mentor, Sean Seah, the Asian Buffettologist, this was what he recently posted on Facebook in our close group.
It is easy to be engrossed in all the media sensationalism and panic, but panicking doesn’t change a thing.
Facts on Wednesday,
- No major banks failed.
- No major company failed.
- There was no war declared.
- The FED did not raised interest rate.
- Martian did not launched an attack on us. (I know that because there is no fighting machine on tripods rampaging across major cities now.)
I have no idea why the market behaved in that manner on Wednesday. My closest guess is that Peter Lynch has had a promotion (Every time Peter Lynch gets promoted, there will be a correction, a claim made by Peter Lynch himself in his book One up on Wall Street.).
Irrational Mr Market
Efficient market proponents will definitely disagree with me on this, however, I believe that the stock market is not efficient. At least not every time. Mr Market is an irrational man, he will have mood swings every now and then. We don’t know when he will behave eccentrically. There is no need to panic or react drastically to his very reaction.
After all, there is nothing that you can do if the stock market decides to crash tomorrow. You cannot control the stock market, but you can control yourself.
What you should do?
- As shared by Sean earlier, the Shiller PE is at 30 right now, investors can starting limiting your risk by reducing your exposure to the market or by hedging your current positions to prevent huge losses. You don’t know when the market will crash. There has been many predictions and guidance by many professionals over the past 3 years, but none has been correct. At least not yet.
- Have plenty of cash. There is nothing worse than not having ammunitions to take advantage of opportunities when they present themselves. There is no use saying, “I saw this stock when it was at $50 and now it is $200 because I didn’t have enough money back then.”
- Have a target. Know what you want to buy and set an entry price. If possible, utilise technology and set price alerts. It is too late to starting doing your homework only after the market crash. Opportunity presents themselves to the prepared.
- Only invest with monies that you don’t need. Many people over-leveraged themselves or invest with monies that they need. When the stock market crash, it is usually in the time of economic downturn. Businesses start closing down and people get retrenched. Many, used to the comfort of the economic boom, are suddenly faced with the fact that they will have zero income for months. Even if opportunities present themselves in the stock market, they cannot take advantage of it. Or worst, they have to liquid their unprofitable positions to sustain themselves.
Investment in Singapore for Beginners
To prepare yourelf to take advantage of the opportunities the stock market presents you is to educate yourself. Chloe Lin, the founder of Invest Travel Play (ITP), was featured on Singapore national papers 联合早报 (Lian He Zao Ba) on 22 Aug 2018, which she actually shared a simple strategy to help readers to start investing safely with just $360 and building up your passive income in Singapore!
If you are looking for investment in Singapore for beginners, and are interested in learning how to make money safely and consistently from the stock market, check out Stock Investing and Options Made Easy Workshop and it’s Skillfuture credit claimable. It is a 2-day workshop that teaches students how to perform fundamental analysis on stocks and ultimately, decided whether to invest in certain stocks. Moreover, the course will also be teaching options strategy, a derivative which combines investing and options to increase your return on investment.
By the way, we also wrote an article on Facebook and Tesla, Singtel Share Price, 800 Super Share Price, Future of ESR-REIT and Viva Industrial Trust (VIT) if you are looking to invest to make passive income. Oh yes, we also wrote an article sharing how you can invest in bitcoin Singapore, just in case you’re looking for alternative ways of investment.