5 things to do when there is a market correction.
Stock market corrections can seem scary, especially if you’re heavily invested in the markets. A correction is defined as a drop in stock prices of 10% or more from their most recent peak. A drop of 20% or more is defined as a “bear market”. A huge and sudden decline in the double digits is known as a crash. These are rare and the market will settle and rebound after some time.
Short periods of decline or increase tend to alternate in the stock market but as a general rule, the periods of increase tend to outweigh the declines. If the market was based purely on arithmetic, it could be just a straightforward matter of waiting out a market dip for the next recovery. However, emotions tend to influence decision-making. Price dips stoke fears and lead to panic-selling. This can adversely affect long-term financial planning.
When a correction happens, don’t panic. It’s actually a sign of a healthy market. Dips and rises are all part of the larger picture. Volatility is part of the game and investing is one way to outrun inflation.
Following the global lockdown in March 2020, the equities market saw a correction. In February this year, inflation fears stoked selling, sending the markets into another correction. In July, the Chinese markets dipped as the authorities tightened regulations on the education, tech and property sectors.
The chart below shows how markets have performed over a six-month period. The global equities market, for which the S&P 500 is often used as an indicator, shows an increase of 17.93%. The local market, represented by the FTSE Bursa Malaysia KLCI, showed a relatively flat return of 1.25%. Meanwhile, the MSCI Asia Pacific Index (ex-Japan) dipped by 9.11% during the same period.
Source: Refinitiv Eikon as of 30 August 2021
Many investors try to time their entry into the market, but what’s more important is the time in the market. If an investor had entered the market 20 years ago and stayed invested, they would be sitting on a positive position right now.
Source: Refinitiv Eikon as of 30 August 2021
A strategy to implement while invested is to spread your risk by diversifying your portfolio into various markets.
Investors who have taken steps to prepare their portfolios for the occasional market drops are generally better able to manage their emotions when prices dip. They can make slight changes, but only where there is a solid rationale to support this decision.
For those who feel they might have missed out on a rebound by panicking and selling early, don’t worry, you can still get back in the game.
These five steps will help you reposition yourself for an opportunity.
While taking all these steps into consideration, financial experts always recommend having an emergency cash fund at hand so you can ride out the corrections without having break your momentum by making major changes to your portfolio. If the market falls, it’s always better to have cash in hand to utilise, rather than having to liquidate your assets at a loss that may not be recouped. For example, a six-month emergency fund would have been enough to ride through the market dip that happened during the lockdown of 2020, and you would still be able to enjoy the rebound.
Here are some examples of funds that have performed well and could help you strengthen your portfolio to ride out the corrections.
If you’d like to take advantage of rapid growth in certain industries in global markets and are willing to take on a little extra risk, RHB Islamic global Developed Markets Fund might suit you. If you’re risk averse and would like steady returns, the Principal Lifetime Bond fund would be a better fit, as it invests mainly in bonds that offer consistent returns over a longer timeframe. For those at the mid-point between starting their careers and retirement, perhaps funds that offer a mix of both would be a good option, like Affin Hwang Select Balanced, which invests in the Malaysian market, or Eastspring Investments Asia Select Income, which invests in the region (ex-Japan).
Source: Lipper Investment Manager as of 31 July 2021
All the above are funds with a track record of more than five years, and offer a high total return compared to their respective maximum drawdown (MDD). Then MDD is the maximum observed loss from the peak to the trough of a portfolio and acts as an indicator of downside risk over a specific period. It focuses on capital preservation, or minimising loss. A low MDD is preferred as this means that losses are small. These funds also come with a three-year Lipper Rating of 4 or 5, denoting superior consistency, total returns and capital preservation.
Your Relationship Manager is ready to help you make the most of your portfolio, so set your appointment today!
Disclaimer:
Investors are advised to read and understand the contents of the relevant Prospectus / Master Prospectus / Information Memorandum / Replacement Master Prospectus and its relevant supplement prospectus (if any) for the Funds, all of which have been registered with Securities Commission (“SC”) Malaysia before investing in any Fund. The SC’s approval and authorisation of the registration of the Master Prospectus / Information Memorandum / Replacement Master Prospectus should not be taken to indicate that the SC has recommended or endorsed the funds. Copies of the Prospectuses are available at all authorized distributors of RHB Bank. Any issue of units to which the Prospectuses relate to will only be made on receipt of an application form referred to in and accompanying copy of the Prospectuses. If in any doubt, consult your banker, lawyer, stockbroker or an independent financial adviser. Investors should consider the fees and charges involved. Past performance is not necessary indicative of future performance. Investors should not that prices of units and income distributions payable, if any, may go down, as well as up.