How to prepare for a falling market

Well, the almost 20% drop (scary for many I see) has seem to past and recovered somewhat, looks like it is over for now.


Instead of saying why the drop happened, let's us look at another perspective.

Many investors view such markets as scary or terrible, buying when the market seems enthusiastic and selling when it seems to be bad.

But aren't we supposed to buy low sell high? The example above seems to be buy high sell low (the more fortunate ones who got out early, could be buy high and sell higher?).

Time to change how you see it.

Market crashes and corrections are like our Great Singapore Sales (GSS), where you can grab quality products for cheap.

The emphasis is quality, yes meaning that the price is down because of market irrationalism, not because there's something wrong with the fundamentals/business of the stock.

And it is not limited to market crashes, it happens to individual stocks every now and then. Sometimes, some news are announced and fear drives the price down, not because of the businesses.

It is important to understand that the stock market is largely a manifestation of fear and greed, which causes supply and demand to change.

So when the market tanks, instead of asking "Should we sell?"

You should be asking, what can I buy?


In order to do that, we must have:

• Reserve of cash
• Watchlist/shopping list

Having either or another is not very useful sadly.

Let's talk about why.

Cash reserves

When you got cash, you can take advantage of "discounts" to buy in and average down to get a huge "margin of safety" as well as get a nice amount of capital appreciation at the end.

That being said, do not attempt to pick the bottom (nor tops), buy in small amounts down. Don't "ALL IN" at one shot, we don't know the bottom so we slowly nibble our way down. Of course, one can slowly increase exposure to buy more down.

Don't look at look at it everyday though, track it by the percentage dropped, say buy in every 10% or 20% in changes of price, instead of buying every 1 cent change and end up missing the big discounts. Looking at it every now and then (maybe market open, lunch and close, less is good depending on your discipline), will help you to not get affected by minor movements and be trigger happy.

Some people will ask, why not be fully invested, cash sitting there don't do anything!

My answer: Unlike fund managers, we have no need to answer to any shareholders less ourselves. We do not need to beat the index every quarter nor every year. We just need to make enough for ourselves and sleep well doing so. I suggest putting reserves in higher interest yielding accounts while waiting. You can add positions along the way (no need crashes, individual stock corrections will do fine). Just standby maybe at least 10-20% of your total portfolio to buy in when needed :)

Watchlist/Shopping List

Sure, we have cash during the drop, but what to buy? If you only start researching then, probably by the time you create those lists, I think, you might see it in recovery midway.

It is true that opportunities are like street cars, when you miss one, another comes around, but one should not jump in blind and get knocked down by that car ^^"

So while waiting for these opportunities (yes. if you don't get it in time, let it go, don't run after the car), do your due diligence, know your investment strategy and research on the QUALITY stocks you like (and maybe some prospective, yet sightly unsure ones). Then wait for the opportunity and pounce on it!

Remember, price is what you pay, value is what you get.

So when you say you see the opportunity, maybe one digit or low two digit P/E ratio, you can add some positions because it is cheaper. Maybe P/B ratio is now 0.7-0.8, good value to buy. Or maybe, the dividend yield is now high enough for me. buy.

All in all, yes, the correction may have ended (for now I guess), but for those who did not add any positions, take this as a lesson and move on. No use crying over spilled milk.

And instead of predicting when the next one is coming, prepare for it. And get yourself ready to follow it through when it comes to greet you again. :)