4 Practical Tips for Investing During a Volatile Stock Market
We are in uncertain times.
For the first quarter of this year, some of the major stock market benchmarks have been tumbling, with some of the worst quarterly losses in two years.
The S&P 500 index and NASDAQ composite have fallen 6.43% and 13.40% year to date.
This uncertainty in the stock market was worsened by the ongoing tragedy that is Russia’s invasion of Ukraine which may adversely affect the European economy and consumer spending and business investment in the U.S.
That’s not all; the U.S. Federal Reserve raised interest rates by 0.25% for the first time in four years since it cut them to near-zero when the COVID-19 pandemic broke out. Although investors were not too bothered by this, the Fed is ready to accelerate interest rate hikes throughout 2022 and attempt to reduce its unprecedented US$9 trillion balance sheet deficit in a bid to slow inflation down.
But, investors fear that the Fed might go overboard and start a recession.
From here, stocks could go on to rise, or there could be more pain ahead.
We can never know for sure how the market will react.
So, how are we to invest amid so much uncertainty?
Here are some practical tips to help you sail through the stock market volatility.
TL;DR: How to Invest During Unprecedented Times
Some ways to stay the course:
- Have a stronger investing mindset by understanding how markets work;
- Tune out from the constant bombardment of negative news, and focus on the positive aspects of life;
- Look out for high-quality businesses; and
- Don’t check your stock portfolio regularly.
1. Toughen up Our Psychology
“I’ve always said, the key organ here isn’t the brain, it’s the stomach. When things start to decline – there are bad headlines in the papers and on television – will you have the stomach for the market volatility and the broad-based pessimism that tends to come with it?” — Peter Lynch
Stocks are inherently volatile.
My good friend, Chong Ser Jing, did a study on the Straits Times Index during his stint with the now-defunct The Motley Fool Singapore.
He found out that from 1993 to 2017, there were a total of 6,411 trading days, and the Straits Times Index more than doubled without dividends.
During that period, however, there were 870 days when the index lost 1% or more, 242 days with a loss of more than 2%, and 90 days when the daily decline exceeded 3%.
This is also true for the US stock market.
As seen from the chart below, even though the S&P 500 index has increased by more than 700% over the past 32-odd years, there have been many ups-and-downs in the short-term.
So, we need to have the stomach to ride through the market volatility.
Some ways to become stronger psychologically would be to:
- Read books on investing psychology, such as Your Money and Your Brain by Jason Zweig;
- Listen to podcasts on long-term investing, such as We Study Billionaires; and
- Read Seedly’s articles on the right mindset for investing (an example here).
Remember, this down market, too, shall pass.
2. Tune out the Noise and Stay Positive
Day-in, day-out, we regularly see negative news on the COVID-19 pandemic that may lead to anxiety.
On top of the mainstream media, we are constantly fed updates on how depressing the disease is from our well-meaning friends in our WhatsApp chat groups or from the Facebook news feed.
The constant bombardment of news may make us more anxious.
Therefore, it would be good to go on a digital detox to tune out the noise if it makes you feel better.
You could cut down on Facebook usage and quit those WhatsApp groups that do not serve you well.
To stay positive, you can meditate or go for a jog at the nearest public park (but remember to keep at least 1 metre apart from others!)
With a clear mind, we can make better investing decisions.
Things may worsen before they become better, and the stock market may fall even further.
However, if we are net buyers of stocks, we should rejoice when stock prices fall and come to a valuation that we are comfortable with to buy.
3. Stick to High-Quality Businesses
The volatility in the stock market can throw up many investing opportunities.
Some stocks may end up trading at firesale prices, but their business fundamentals may not be that great.
Meanwhile, high-quality companies will have come down from a high valuation to fair value. Or even better — from a fair valuation to being undervalued.
So, the trick here is to be patient and not swing your bat at every pitch, but to wait for the perfect pitch.
As the world-renowned investor Warren Buffett, mentioned in his documentary, ″Becoming Warren Buffett”, we don’t have to take action all the time when it comes to investing.
“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.”
My friends from The Fifth Person have written a great piece on the topic of choosing strong businesses, and I use a similar framework to pick quality stocks as well.
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.
Strong companies with the characteristics listed above may also take a hit during a downturn, but they usually bounce back quickly when things clear up.
When high-quality companies are trading at prices on par or lower than their intrinsic values, it could be a perfect pitch for you. And you have to swing hard.
4. Bonus Tip: Limit Access to Our Trading Account
With technology, it’s so easy to buy and sell shares.
To ensure that we don’t sell our stocks irrationally amid the volatility, and make those paper losses permanent ones, we can consider limiting access to our brokerage accounts.
How can we do that?
One way is to get your loved ones to change your trading account’s password for you and only give you access to it at a set frequency (say once every month) to buy quality stocks.
In that way, we won’t emotionally sell fundamentally-strong companies during the next market decline.
It would also limit us from frequently check our stock portfolio since scrutinising it daily doesn’t make sense as a long-term investor.
Good, or good?
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.