During a decline, some might panic, some might be excited and most will be anxious. But the first thing that you need to do is….
Step 1: STAY CALM
Always remember this quote, “It’s always darkest before the dawn”. So, you need to believe in the logic that a market crash is always temporary. No matter how long it is. Look at the COVID crash. Markets were down by about 30%, but everything started recovering within months and stronger than ever! It’s crazy. Yes, the market might have recovered because of some government efforts. But let’s not discuss it in this post.
Step 2: Clean up your portfolio
Get rid of any positions that you no longer believe in. It is not the time to continue holding that company that you hope will pull a miracle. Get rid of it. One good way of determining which company you want to get rid of is by imagining this.. IF the overall market were to dip by 50%, which positions do you have so much conviction in that you would not care. You believe in the fundamentals and long-term plan of the company that whatever that is happening to the stock price does not bother you. Once you have determined which are these companies, SELL THE REST. Now, some of you might see this as panic selling. This really isn’t. You have to realise and admit that we are all human. We make mistakes. Somewhere during our investing journey, we got confused. We made bad purchases. It’s okay to admit that. By admitting that, selling away and cleaning up our portfolio, we are able to do the next step.
Step 3: Prepare to BUY
This is the most important part! GATHER ALL your cash, fool! You cleaned up your portfolio? Good! Now you have 30-40% of portfolio in cash. Save as much as you can. It’s not the time to buy the fanciest iPhone. Save that $1.5k. Buy AAPL shares instead. Because, during a crash, everything is on discount. I would go ham. I wouldn’t stop at cleaning up my portfolio. I would clean up my entire bedroom. Sell EVERYTHING that I didn’t need anymore. I would gather as much cash as I can. Just be ready to buy and have cash at hand so that when the opportunity comes, you can make make those Buy orders without hesitation. IF the opportunity comes, which brings us to….
Step 4: Formulate a plan
The same way you do online shopping is the same way you should invest. Have a list of things that you plan to buy. Some people even place it in their shopping cart! Same idea. Do your research and decide what companies you want to buy. Give yourself 3 – 4 entry points. I make it a habit to write them all down. Giving yourself a few entry points will give you a back up plan if the stock that you bought dips lower. I don’t want you to feel that you entered at the wrong time. I want you to think that you got a BIGGER discount! Celebrate and add more positions! Once you have your strategy, your “shopping list”, all you need to do is..
Step 5: Wait and execute
Let your research and planning pay off. Believe in yourself. Believe in the process. You have spent the time to research and you’ve done your due diligence. So, stick to the plan. No matter how scary the situation looks. Buy when a stock hits your entry point and build your portfolio.
And that’s all you need to do in a market decline!
(This article was originally posted on 01/11/20)