Mar 14, 2020 in Counseling

Coping in a falling stock market

Current situation of the corona infections causes anxiety, but when it comes to financials, many become even more stressed.

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After 11 years of constant stock market rally, a large group of my friends and clients were shocked when the equities and some fixed income market instruments started to fall in a way that they never experienced before. Some of them started trading or investing few years ago, so they were really unlucky to face a crisis like this one with no previous experience. 

 

Since last week than my phone’s almost constantly ringing: is this the bottom? Is there going to be another couple hundred points rebound? Is it safe to short from here? Swiss franc or Japanese yen?

 

Volatility is part of the markets. The fact is that no one knows for sure whether the stock market will soon enter a bear market, how long that bear market will last. Take a look on the S&P500 chart and try to find the previous crises, in a long-run they look like a tiny downturn. They were as painful as the current one.

The question is how much time you have left to wait for the upturn. 

I do not provide investment advice, it may be carried out by licensed professionals only, according to your country's rules. But there are basic rules in the investment industry.

 

1, Do not panic. Unless you are a prompt trader in a bank (but then why do you read this, go back to work!)  there is always time to sit down, drink a glass of water or two and think over your situation. 

2.There is no general rule which fits all. Based on your age, risk profile, finances, temparement, attitude you must estabilish your own strategy for your savings and stick to it. If you find this impossible, seek professional advice, at the end of the day it is much cheaper than your sudden impulse decision. If you have a strategy, you will never panic. Strategy must be built in calm times.

3. Make yourself financially bullet proof, diversify. If you do not know, how, go to 2. 

 

What about short-term trades, speculation? My advice is that if you are "a freshcomer", do not enter the stock market now, even if you may feel that you have missed the opportunity of the lifetime. 

It’s not just that a pandemic that hasn’t hit the Earth since the Spanish flu and now we need to incorporate a completely unknown variable into the formula. But it is also about whether to invest or speculate only when the risk-return pair gives you some meaningful ratio. That’s not the case now. 

More than 20 years ago, when I started working on the stock exchange and on the first trading day of my life, a crisis in Argentina began, I ran to the leading broker. I asked him what to do now, what position should I open, how much capital should I trade?

He replied with a cliché. By that time I didn’t know it was a cliché. But it was the best advice I had then, and I’ve been using it in many cases ever since:

Sit on your hands. Literally.

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