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The recent sell-off in local markets at the begening of February, left many investors and traders freaked out as we lost a little over 10% in a matter of seven trading days before a small bounce.
The bigger picture is that a 10% pullback is a fairly common event – we had one in the lead-up to the ANC elective conference.
But this most recent one was different as it was initially straight down, with no green days.
It also coincided with global markets selling off fast and heavy. So this time it did seem that maybe this was the end of the world – or at least the end of the bull market.
The ideal responses to such a situation are simple. If you’re a trader, you would have had stop losses in place (prices at which you exit the trade no questions asked) and you’d have actioned them pronto.
As investors, we should not get panicked into selling. Rather, we should check if any of our desired stocks have reached prices we like, and then we start buying some at the discounted price.
Important here is that we need a list of the stocks we like and their corresponding desired buying prices.
But also important is that we don’t go crazy as if we’re snatching up a R100 TV on a Black Friday special. We buy slowly, as prices may fall still further, offering even better entry points.
This, at least, is the theory, and it is all nice and easy to write about. But when it is happening it’s a whole lot harder to control one’s impulses.
As I mentioned, a 10% pullback is very common and truthfully a pullback of over 30% is a guaranteed future event in our market – it’s just the timing that we are unsure about.
Regardless of whether this is the start of something bigger or just a correction in a longer-term bull market, this recent sell-off is a great practice round.
The reality is that if you only started in the markets in the past nine years you’ve never experienced a true market crash.
So how did you respond to this sell-off?
How did your trading portfolio handle the sell-off?
And did you panic?
Basically, we can use this sell-off to stress test our response to falling markets.
If you failed to execute your stops, why was this? How can you ensure that you will the next time?
Was your trading loss severe enough that your confidence is now shot? Or is your portfolio maybe on the brink of being wiped out?
If the answer to either is yes, then you need to seriously revisit your trading strategy and style.
You could consider entering hard stops into your broker’s system so as to remove yourself from the process. Reduce trade size if losses were overly large.
As an investor, how did you experience the sell-off? Did you calmly survey your list and maybe pick up some of your favourite shares at bargain prices or were you struggling to sleep at night worrying about your portfolio?
Did you respond in a knee-jerk manner, maybe blindly following some suggestions from Twitter users without any real thought or strategy?
Check your responses and see if they seem right. If this sell-off has been stressing you out, then your portfolio is badly positioned. Which aspects caused the stress?
Can you do something about it (like reduce size or the position entirely)?
A crash is absolutely coming one day, and knowing how we’ll respond is important because it enables us to position our portfolios so that these sell-offs do not cause us sleepless nights.
This is a shortened version of the cover story that originally appeared in the 1 March edition of finweek. Buy and download the magazine here.
