Following last week’s stock market plunges I am starting to hear fear creeping into the mentality of many traders. 6 months ago the most common brag of punters is he or she invested in this stock or that stock and made X% in so many weeks. Now, the most common brag is that he or she got out of the market last year having read the signs from technicals/sub-prime/interest rates/[insert reason here]. Nobody is talking about buying. And this goes not only for Malaysian traders, but also traders all over the world, with stock markets all over the world plunging into levels when people start wondering whether it will ever recover to its previous highs, and even solid blue chips with low betas are following the market south. Even bond prices have been falling, wreaking havoc on diversified portfolios. In short, only long commodities funds were unaffected. Amidst all this, many people are trying to figure out what to do next and considering whether to buy, or sell, or wait. In the light of all this here a few points to consider:

1) Were you caught unprepared by the recent stock market plunge? If so then the key lesson to take away here is how hard it is to time the market. (Tradingmalaysia has been bearish on the stock market for over 1 year, and is pleased even to have gotten it right by that margin!). Therefore you should be honest with yourself and seriously reconsider whether your trading tactics will really be able to help you time the next market bull if they failed to help you time this market bear.

If you’re still holding onto positions that have lost money, your signals are broken, and you have nothing but hope then you should get rid of them, go back to the drawingboard and start planning again. As traders we must look to the future and discard trades and ideas which do not work. Remember that you do not need to be able to time the market to make money. You just need to have a good system that you can execute well. The question you should be asking is: do you have such a system?

2) Are you are a long term investor (as in, were you a long term investor 6 months ago and not someone who used to be a short term trader but have since become a long term trader because your trades have not worked but you are reluctant to realise losses and sell - yes, you know who you are!!)? And do you have a regular income and have you been regularly investing in stocks which are fundamentally sound? If so, then then you should stick to your plan and continue to buy. This will average down the cost at which you acquired your shares over time and benefit you in the long run. Remember, the best time to buy is when everyone is selling.

Let’s take Tradingmalaysia’s portfolio as an example. This is a portfolio which consists mainly of companies which I consider to be good and either cheap or pay good dividends, and which I am regularly investing my income into (on a monthly basis). And because I have been bearish the market, only 65% of the money has been invested. Over the next year, I will gradually increase my equity allocation to 100% and continue to invest my regular income into the portfolio, bringing the average cost per share right down so that I am positioned to benefit from the next boom. For more detail on this I will post again tonight with some concrete numbers regarding the portfolio so that you get a better idea of how a long term portfolio should be managed and how it performs especially under duress. I think you will be surprised at the result!