eBusiness Weekly
Taking Stock
Kudzanai Sharara
After 22 days of consecutive stock market gains, the market took a breather on Tuesday and has been falling up to yesterday.
The pullback is normal and can be attributed to anything, from profit-taking to market corrections. In most cases, stock market pullbacks tend to take people by surprise, but probably not this one.
Given the strong rally in a very short space of time, I would like to believe most investors, even those who bought right at the top anticipated it.
Before the latest pullback, the Zimbabwe Stock Exchange market capitalisation had reached a record $1,893 trillion.
Questions were being asked whether the market was now not overvalued. In other words, people were now expecting it to come off. However, while the pullback might have been anticipated, some investors still panic when it happens and offload their holdings at a loss. The panic and fear feed itself that the overall market loss could end up more than intended.
To those who feel anxious that the stock market is headed for a pullback in the short term, there are a few things that they need to put into consideration.
The first one is a simple truth that investing is a long game, and investors should be holding onto assets in their portfolio for periods measured in years, not days.
The second piece of advice is that “when in doubt, wait it out”. If you do not know the reason why others are selling and your investment objectives are not affected why should you panic sell?
However if you are convinced a sell-off is coming, rather than about of shorter-term volatility, and you still want to adjust your portfolio, consider selling some of your investments that are trading near their highs.
Selling some portion of investments that have done well, while preserving the principal amount you invested in the first place, is one way to prepare for a correction. This is also known as crystallising your profits.
The third piece of advice is for one to always have an exit strategy before even buying the shares. When one has a selling strategy, it, and not emotions will make the decision. Once a target price is reached, it’s time to look elsewhere for better returns.
Another example is when one decides to sell some portion of your holding after a stock’s price has fallen a certain threshold (say, 10 percent). This one is more like a stop-loss strategy and is good for those investors who can tolerate a certain loss threshold, but not much more downside.
The fourth way around is to have a diversified portfolio. As much as the overall stock market might be coming off, it’s not each and every counter that will be on a sell-off. Stocks come off in phases. Big caps might come off at a different time to mid-caps or small caps. A diversified portfolio can help to balance out risks in the market. In other markets, investors can diversify into bonds, commodities and cash. These assets don’t all move together.
The fifth way is to probably look at stocks that are in different sectors or to switch to value stocks in lieu of growth stocks. Value stocks are companies that are undervalued based on their profits and expenses.
On the other hand, growth stocks are those targeting rapid growth by running up large corporate tabs that can make them more vulnerable during economic downtimes. Value stocks generally pay dividends which means investors will continue to earn money even if a stock’s price falls.
Therefore, value stocks, unlike growth stocks, can help whether some storms in the market.
Lastly when buying or selling always avoid paying market prices. Whether buying or selling, investors must place limit orders. With a limit order, you specify the price you want to buy or sell at, and the trade is only executed at that price or better.
Another way of protecting self is to place your orders in batches and buy or sell a stock as its price moves higher or lower. That can reduce risk substantially because one is not taking the full position at the same time.
By having a plan in place before a sell-off occurs, you can make a clear-headed decision when the market gets volatile. That way you won’t be tempted to sell shares at the worst possible price.
