What should we do in a market going through a major correction like what we saw recently?
Many bloggers said “Stay Calm, Don’t Sell in a Panic”. This is THE #1 BEST advice that one can receive in a market like this.
BUT honestly it is easier said than done
When we see the market dropping a few percentage points a day for a few days in row – I wonder how many people can really hold their nerves and don’t regret that they should have sold earlier and buy back later. Not easy indeed – stock market investing is not for the fainted heart investors for sure.
But if we have only invested using our “non-emergency” cash, then it is okay to take this advice. I still think it is the BEST advice to give to inexperienced investors at this time.
Selling into a free-falling market is the easiest way and sure way to lose money. If you can “tahan (local slang for hold on), then hold on and collect dividends in the interim and wait for the rebound. It will come just a matter of when ….
Personally, while I subscribe to this advice, I do feel that this is too passive for me.
While I don’t liquidate my investments in a market undergoing major corrections, I will take a hard look at whether there is any opportunity for me to re-optimise my portfolio and do a fair bit of trading or swapping to “upgrade” my portfolio.
When the market corrects, it is often that not all the shares will drop by the same magnitude. Some will drop by 20%, some 10% and some maybe just 5%.
In the last few corrections (and also in this one), the question in my mind in the midst of the correction has been – Can I trade the 5% ones for the 20% ones, especially when the former are those less desirable companies in my portfolio while the latter are those with strong balance sheet.
Take for example, in this case, CDL Hospitality Trust. It was badly hit in the last few weeks. On 20th Jan, it was $1.66 but yesterday, it was only $1.33. That is a drop of 20% in 6 weeks.
Yes, we know CDL HT will be severely impacted by the COVID-19 situation.
But will it collapse into bankruptcy because of it? I don’t think so. Will the COVID-19 situation paralyse the world forever? I don’t think so.
Maybe it is not next month, not next quarter but given enough time, maybe one year later, I believe mankind will be able to “tame” it and our life will return to normal (or maybe a slightly different new normal with more people wearing masks when walking around).
At a gearing of 35%, a cost of debt of 2.4% and interest coverage ratio of 7x (source: 2018 Annual Report), I think CDL HT is in a relatively good shape to ride through the current challenge and hopefully emerge stronger.
It will be stronger if it can acquire good assets at attractive price or in a best situation, at fire sale price and/or by having fewer competitors after all the dust has settled as the weaker ones fall by the wayside during the downturn.
Now take another Reit – Soilbuild Reit. On 20th Jan, it was $0.54 and yesterday it was $0.48. Its share price fell too but only for 11%.
Honestly, I would have traded Soilbuild Reit for CDL HT anytime. The latter is a much stronger company.
So, in the few days, I disposed off all my Soilbuild Reit shares and for the money that I received, I swapped them for CDL Hospitality Trust. I only managed to get them at $1.35 and thus, I am seeing a further 2-cents loss while Soilbuild Reit was steady at $0.48 throughout.
I didn’t regret my decision – I believe in time to come, CDL Hospitality Trust will rebound stronger and faster than Soilbuild Reit and continue to give 5-6% yield to me for years to come.
I hope by sharing this, it may trigger some thoughts in you to see if similar opportunity is available for you.
Having said that, the best situation to be in is to have spare cash available to do some bottom fishing and bargain hunting. Then you don’t even have to do trade-off like me.
There is this article from Kin Chuah that I would recommend you to read: https://mrtfi2024.wordpress.com/2020/02/29/opportunity-fund-deployed/
He has obviously planned ahead and proactively for a market correction. He has kept his warchest ready. How many of us are like him … how I wish I have a sizeable warchest today too.
I think he is going to benefit greatly from this correction and I wish him all the best.
I will leave you with his simple strategy in a market correction/crash was:
If my portfolio is down as compared to end of last year’s value AND the drop is triggered by market correction/crash, then I will
start to deploy the first 30% when portfolio is 5% down
deploy the next 30% (60%) when portfolio is 10% down
deploy the next 20% (80%) when portfolio is 15% down
deploy the last 20% (100%) when portfolio is 20% down
hold and wait for recovery when portfolio continues to drop.
Hope you find inspiration in this too.
Wishing you a great investment week. Hang on and sit tight for another likely volatile week.