The Problem with the Recent Stock Market Crash
And how I intend to prepare for the next one
Seeing a sea of red in my investment portfolio excites me.
I love stock market crashes.
There’s just one problem I face when this happens.
During market corrections, stock prices tend to drop in tandem. Mr Market does not discriminate.
The stock prices of both good and bad companies get punished.
When stock prices are in free fall, and everything appears “cheap”, one question that constantly comes to mind is “what should I buy?”
This brings me to the point about preparing for the market correction, something which I failed to do prior to this latest one.
This made it a case of too many stocks to buy, too little cash.
Preparation should entail the following:
A watchlist of stocks to buy
How much of each stock to buy (as a %) based on the size of warchest to be deployed into the markets.
Price levels to buy at
Why the sudden decline?
Long story short, the recent market correction can be attributed to 2 main factors
Yen carry trade
For the longest time ever, due to Japan’s negative interest rates, investors could borrow cheap yen, giving rise to the yen carry trade.
When the Bank of Japan (BOJ) raised interest rates to 0.25%, those who used leverage were getting margin called.
Recession fears
The latest jobs report showed unemployment rate at its highest in 3 years, which seems to signal an upcoming recession.
This had a carry-on effect to stock markets around the world.
Japan’s Nikkei 225 Index dropped 12.4% in one day, its worst single day performance since 1987.
The Nasdaq dropped 10% after the U.S jobs report.
Unsurprisingly, the crypto markets showed a greater decline, with Bitcoin falling 20% from its high.
What should I do as an investor?
If you’re someone who’s been in the markets long enough, you’d have seen this movie scene being played time and again.
The only time to sell your stocks is when the company’s fundamentals has deteriorated.
The best time to go shopping for stocks is when the market decline is due to macro factors, rather than company specific risks.
We all have finite capital, and it can be confusing not knowing which stocks to buy during a correction like this.
It’s why we should prepare a watchlist of just a few stocks, percentage allocation based on our warchest, and a few buy levels.
I hope you enjoyed reading this piece as much as I did writing it.
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