How to survive a stock market crash
Question: I bought some stocks a few months ago and I have been losing since then as stock prices continue to fall. I still have extra cash to invest but I am not sure if I should buy more or I just keep it in the bank. What should I do?—Leedee Lopez by e-mail
Answer: The stock market will probably fall further as global sentiment turns bearish amid fears of rising interest rates and inflation. I mentioned in my previous column “Is the PH stock market bull run over?” published last June 12 that another round of massive selling may cause the market to break down and probably lose 1,000 points or more in the weeks to come. After the heavy selling lately, the market should soon test the 5,400 level.
Though currently struggling, the market may correct on technical bounce anytime this week but should be limited up to 6,200. If you have any stocks that you want to get rid of, this is your opportunity to get out. You can cut your losses on rally if your stocks recover to less than 10-percent loss, otherwise, you may just hold on to it and wait. There is no sense selling all your stocks in panic when the market is falling fast. To survive this market, you need a game plan, a sound investment strategy that will keep you flexible and focused.
When you invest in a falling market like this, you need to be prepared psychologically that you are ready to lose money. When you accept this to yourself, you will feel less stressed and emotional under the worst market scenario. The calmness that comes with it enables you to be more objective in making buying decision. When you are focused, you will have the patience to wait and buy the stock at the price you want.
The investment strategy that you will develop must define the amount of risk that you are willing to take. How much money are you willing to lose? How do you minimize your risk exposure? Should you invest in variety of stocks to diversify your risk? Should you buy small stocks that promise higher returns but riskier? Or should you just invest in slow moving but more stable blue chips?
One way to measure risk is by looking at the volatility of a stock in relation to the general market called the beta. The higher the beta of a stock, the higher the potential returns but the higher the risks too. For example, the beta of Megaworld is 1.78. This means that for every 1-percent increase in the PSE index, the stock will go up by 1.78 percent on the average. Similarly, if the PSE index declines by 1 percent, the stock will also fall by 1.78 percent. You see that high beta stock like Megaworld can be risky because it is highly volatile, but can offer higher returns when the market goes up.
If you are more inclined to take higher risks, you can have portfolio of stocks that have betas of more than 1.0. Some of these stocks are JG Summit (1.92), Alliance Global (1.89), ICTSI ( 1.45), Meralco (1.25) and Ayala Land (1.29). If you want to reduce your risk exposure, you can balance your portfolio by including stocks with betas lower than 1.0. Low beta stocks are considered more stable and less sensitive to day-to-day market fluctuations. Examples of these are PLDT (0.76), Jollibee (0.64), SM Prime (0.62), Aboitiz Equity (0.60) and Globe Telecom (0.59).
Some stocks do better than others in a declining market. You can further filter your stock selection by looking at their fundamentals. How is the company meeting market expectation in terms of earnings? How reliable is the management team? How cheap is the current price of the stock compared to market? How close is the stock to its 52-week low? After you are satisfied with the information, you can prepare your shopping list and start looking for opportunity to buy at bargain prices.
There is no need to rush buying all the stocks at once when the market is falling. You can buy slowly as stock prices fall. Do not wait to catch the bottom when the stock price is falling because you may never get it. Perhaps, you can do averaging over a number of days or weeks to make sure that your cost is lower than the market. You may find using charts useful to help you identify possible support levels for your buying position.
A falling market creates lots of bargain stocks. There is no better time than now to create a winning stock portfolio for the future. Build your core holdings with high dividend-paying stocks. I have mentioned in my last column “Is it good to invest in bonds?” that PLDT has one of the highest dividend yields at the moment with 5.9 percent a year. This is one stock that you must have in your portfolio.
You may be able to buy this stock at a higher yield if the share price falls in the next few weeks. If you can catch it at its historical support of P2,700, your dividend yield would be 6.5 percent a year. Keeping this stock at this yield will guarantee you cash returns better than money market plus the upside opportunity to earn capital gain when the market recovers. High dividend yield stocks tend to outperform during tough times because investors perceive it to be less risky.
When you understand how to manage your risk by developing a solid plan, you can actually take advantage of market crashes instead of getting burned by it. You can turn crisis into opportunity.
Henry Ong is Registered Financial Planner of RFP Philippines. To learn more about financial planning and how to become RFP, attend our FREE personal finance talk on Sept. 5, 7 p.m. at PSE Ortigas. To reserve, e-mail at [email protected] or text <name><email> <RFPinfo> at 0917-3464126.
