I’m sure you’ve seen or heard the headlines, yes, the global stock markets are fluctuating as a result of fears about the wide-spread coronavirus. We have no idea how far or fast the disease will spread, and neither do the markets. Nobody could possibly predict the subsequent declines.

It is absolutely normal to panic, no matter how much you feel well prepared, the volatilities always come to you like a surprise every single time! But it is actually also pretty normal to have volatilities.

I pulled up two charts below:

  1. The biggest market: US S&P 500 Index
  2. Our local market: Australian ASX All Ordinaries Index.

In US, since 1980, on average the market drops from time to time almost every single year and more than 10% in many cases but the majority of years had positive returns. It is so-called “Corrections”. Australian ASX All Ordinaries has the similar pattern. So this is more normal than most people would think. And generally, when there was massive drop at some particular years, the market tended to bounce back in the subsequent years.

So what do we do when the stock market’s momentum changes so fast and you see your recent gains slipping away? Here are a few actions people take:  

Action #1: ACT TOO HASTILY

Sell today straight away, and then watch to see how the spread of the coronavirus plays out and buy back at perceived “turning points”. The odds are pretty much impossible to catch the bottom, not knowing when to get out (Yesterday? Two days ago?), especially not knowing when to get back in, mean that your odds of getting it right twice are very low—and remember that you already missed the first timing decision. I made this types of mistakes in 2008 and 2009 myself.

Action #2: WAIT FOR IT TO GET WORSE AND THEN SELL

Wait until there is confirmation that we are, indeed, in a real bear market, and then sell at or near the bottom with more fears, and then you will see the markets rise past where you sold and only had to buy back at higher prices at later stage.

Action #3: STAY OPTIMISTIC

Hold tight, ride out the downturn (however long or short it might be) and experience the next rise (whenever it comes). You’ll do some sweating along the way, but in the end you’ll look like a winner. Or if you have additional funds, it could be also an opportunity to buy good assets at a better price.

I have personally done all three types of actions to my own investment before and witnessed all those actions people did during my career all those years. You now know which action won over long term. But of course, it also depends on how much risk tolerance you have, how long your investment timeframe is, how much additional funds you have and how close you are to retirement…..

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