“The investor’s chief problem — and his worst enemy — is likely to be himself. In the end, how your investments behave is much less important than how you behave.”
— Benjamin Graham
The stock market is made up of all kinds of investors.
Investors may feel optimistic when the market is on a bull run, assuming it will continue rallying and thus, throw caution to the wind.
On the contrary, during a bear market, investors may become extremely pessimistic and do things that are to the detriment of their financial well-being.
Talks are rife now that the current market rally that started on 23 March will run out of steam, and we could see more downside.
Whatever the case may be, if we are disciplined and don’t break certain investing “rules”, I think we will be fine over the long-term.
On that note, let’s explore 10 things that investors should not do in the stock market, especially during the volatile market conditions brought about by the COVID-19 pandemic.
TL;DR: 10 Don’ts of Stock Market Investing
Here are some strict no-nos when it comes to investing:
- Don’t invest without laying the right foundation;
- Don’t leverage;
- Don’t invest your emergency funds;
- Don’t invest with the cash that you need in the next five years;
- Don’t try to time the market;
- Don’t invest all your money in a single stock;
- Don’t panic-sell during a market crash;
- Don’t buy stocks just because they look cheap;
- Don’t monitor your stock portfolio every day; and
- Don’t invest all your money at one-go, especially during a market crash.
1. Don’t Invest Without Laying the Right Foundation
The stock market holds lots of promise.
We would have heard stories of people amassing wealth by investing in stocks over the long run.
But before we jump onto the investing bandwagon and buying our first stock, we should sort out our basics first.
The three important things to do before we invest is to ensure we have:
- Paid off our high interest loans;
- Adequate insurance protection; and
- Set aside enough money in case of any emergency.
2. Don’t Borrow to Invest
Cheap money is intoxicating. Especially during a low interest rate period like now.
The fact that the Straits Times Index is still far off its 2020 peak makes leveraging even more tempting.
However, before we get all too greedy, we have to understand that the stock market rally may just fizzle off, and we could be in for another crash.
How would we react if we have invested borrowed money and the stock market crashes 30% again, taking our stock portfolio down with it?
Would we be able to sleep well at night?
Can we handle the pressure of paying interest on our loans and at the same time, managing a portfolio that’s deep in the red?
Borrowing to invest just adds another layer of financial risk that we can easily avoid.
It’s far better to invest prudently using the money we have and have a peaceful sleep than to leverage to fulfil our greed for outsized returns.
3. Don’t Use Your Emergency Funds to Invest
If you are thinking of liquidating your emergency funds to invest…
As tempting as it can be to borrow to invest, it’s also enticing to invest your emergency funds, especially during a down market.
Well, I, too, had the thought of liquidating my emergency funds stashed away under the Singapore Savings Bonds to invest in stocks two months back.
I could be sitting on some good gains if I had done just that.
But, I reminded myself that investing in the stock market isn’t what the emergency fund is designed for.
An emergency fund is to be activated for urgent and unplanned life events only.
Investing to take advantage of lower stock valuations was never the objective of my emergency funds in the first place.
4. Don’t Invest With Money You Need in the Next Five Years
While the stock market will almost certainly rise over the long-term, there’s simply too much uncertainty in stocks in the short run.
The current volatile market condition is a great example.
To help ensure that we don’t cut our stocks off prematurely, we should only invest money that we don’t need for at least the next five years.
If you need the money within the next five years, for say your wedding, home renovation, or kid’s education, it would be better to put in safer instruments such as fixed deposits or high-interest savings accounts.
5. Don’t Try to Time the Market
“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.” — Jack Bogle
Some investors might feel it is better to exit the market when it is falling and hold onto cash.
When the market recovers, they can then buy stocks again.
In theory, that sounds perfect.
But in reality, market timing is a tough job, as alluded by the late Jack Bogle.
No one can know exactly when to exit the market before a crash and when precisely to buy just before a market upturn.
Various studies have shown that being out of the market and missing the best market days can significantly reduce long-term returns.
For example, according to Endowus, the MSCI All-Country World Index produced a return of slightly below 160% from 2001 to the end of April 2019.
Of those 4,730 trading days, if you had just missed the 10 best days, the return drops significantly to only 46%.
Missing the top 20 days would put you in negative territory.
Totally not worth it.
6. Don’t Invest All Your Money in a Single Company, No Matter How Great It Is
All stocks come with risks. Even the world’s best business.
Therefore, we should always diversify, diversify, and diversify our portfolio across many companies, sectors, and even geographies.
We can also diversify across time, as discussed under point 10 further down.
7. Don’t Panic-Sell During a Market Crash
The huge run-up came about despite the many economic crises and market crashes in the last 30-odd years.
Including dividends, the S&P 500 soared around 2,100%.
What we can takeaway from this is that we shouldn’t panic-sell in a plunging stock market as that will just crystalise our paper losses.
If the companies we have bought are of high-quality in the first place, they usually bounce back strongly from big sell-offs. So, we should stay the course.
8. Don’t Buy Stocks Just Because They Look Cheap
What’s cheap can become cheaper.
Instead of focusing on the “cheapness” of a stock, we should pay attention to its fundamentals first and only invest in high-quality companies that can withstand the tough times.
Such strong businesses tend to have:
- A wide economic moat;
- Track record of growth (growing revenue, net profit and cash flow);
- High gross and net profit margins;
- Strong balance sheet (more cash than debt);
- High return on equity; and
- Favourable long-term prospects.
Quality stocks can also be sold down during a market crash, but they seldom trade at cheap valuations.
9. Don’t Watch Your Stock Portfolio Daily
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” — Warren Buffett
As long-term investors, we are buying businesses and not mere pieces of paper.
Stocks can bobble up and down by the second, but business fundamentals don’t change frequently.
Therefore, looking at our stock portfolio every day to see if it’s making money may make us act irrationally.
10. Don’t Invest All Your Money at One-Go, Especially During a Market Downturn
We never know what the market is going to do next. Therefore, in my opinion, it’s better not to invest all our money in a single transaction.
A more prudent way to approach the market, especially when it’s falling, would be to dollar-cost average.
By dollar-cost averaging, we are also able to diversify across time as we become more knowledgeable about a particular business that we own.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.