March 29, 2020 | Som Thapa
At current, the stock market i.e. Nepal Stock Exchange (NEPSE) is closed. As a preventive measure against the corona virus (COVID-19) outbreak, the government has decided to close the market down.
Investors staying at home are worrying about the course of market action after the opening. Will the market decline further? As the market was on the bearish trend before its’ shut down, investors expect the market to plunge further due to the impact of the virus outbreak.
Or, as opposed to this, will the market catch the upward movement and will there be a new bull market ahead? Same happened after the devastating earthquake of 2072. Nepal Stock Exchange closed for one month during that period. After the opening of the market following the earthquake, Nepse Index declined from 938.19 to 837.83 in the first 4 tradings days. However, after falling for 4 days, the market witnessed one of the great bull market rising to 1881 in just 2 years. This includes the period of economic blockade by India.
So, what will be the movement of market in the comings days after it opens? No one cay say with certainty. Only time will tell.
However, this article is not about what the market will do after it opens and how should the investors react?
This is about doing what the investors can do. The market is not in the control of the investors. One thing they can control is their own action.
Here are 3 things that investors can do during this period:
1. Reflect your Investment decisions
An investor makes several decision in his investing life. Some decisions made huge profits for the investor. While other decisions are worth forgetting. Also, there are other several decisions which brought neither gain nor loss for the investors. This period of market halt may be the time to reflect your past decisions. Which actions caused you to profit from your stocks? Likewise, which stocks led to huge losses? You will find similar features in the profitable stocks. Also, losing stocks might have identical traits. This careful evaluation will make you aware about what type of stocks to buy and what type of stocks to stay away from in the future.
Also, analyze your behavior of decision making in investing. Were you scared when you decided to purchase some stock? How much did you lose because of your inaction? Similarly, were you impatient to purchase stocks at the market peak? If so, what this decision has cost you? This is the moment to evaluate your past psychological errors and biases and try to minimize them.
2. Rearrange your Portfolio
Warren Buffet once quoted “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” This might be the time to reconsider which stocks would you like to own even if the market closes indefinitely. Several Investors have made purchases to sell in a short period of time. This closedown has caused those investors worried. With no market to trade, these investors might feel uncomfortable because they don’t feel comfortable at their portfolio.
Hence, it is the period to reflect your portfolio and make the rearrangement decision. Make a list to get rid of the stocks that you feel unsure about. Replace them with those stocks that will provide higher return with as little risk as possible. You might not feel completely safe with stocks. However, there will be some stocks where you will feel more confident than others. Some companies are performing more efficiently than others and are financially stronger. Such stocks might be worth holding even in the bear market since they provide more assurance of comeback once the market changes its direction.
3. Plan Your future course of action
In this spare time, it is wise to plan your strategies and plot the course of action on which you wish to conduct your investment operation. Make investment goals and develop effective action plan to achieve than goal.
The goal can be to achieve 20 percent return on investment throughout your investing career. To reach the goal, the investment strategy can be long term which may include holding stocks for 3 or more years. Other strategy may be to book the profit when you achieve 20 percent return. Likewise, it can include selling a stock when it declines by 10 percent from your purchase price or on contrary holding on even if it declines further and purchasing on the way down. Some investors prefer averaging down strategy while there are others who like averaging up.
There are various investing techniques out there. The question is not whether one is better strategy than the other. Mostly, the problem doesn’t lie on the strategy. The major problem lies on the inability of the investor to stick to their planned course of action. Suppose, you have made a strategy to sell when the stock price gains 20 percent. Furthermore, the guidelines also tells you to sell your stocks when the price falls below 10 percent from the purchase level. However, most of the investors sell their stocks when it rises by 20 percent. But they hold on to the stocks that lose more than 10 percent. This is what not sticking to your investment plan mean.
Here, I intend to suggest developing your own system of investing and sticking to it. During this resting period, you can take a step back and go into the basics and start over with a renewed vigour and plan.