5 things to do when there is a market correction.


Stock market corrections can seem scary, especially if you’re heavily invested in the markets. A correction is defined as a drop in stock prices of 10% or more from their most recent peak. A drop of 20% or more is defined as a “bear market”. A huge and sudden decline in the double digits is known as a crash. These are rare and the market will settle and rebound after some time.

Short periods of decline or increase tend to alternate in the stock market but as a general rule, the periods of increase tend to outweigh the declines. If the market was based purely on arithmetic, it could be just a straightforward matter of waiting out a market dip for the next recovery. However, emotions tend to influence decision-making. Price dips stoke fears and lead to panic-selling. This can adversely affect long-term financial planning.

When a correction happens, don’t panic. It’s actually a sign of a healthy market. Dips and rises are all part of the larger picture. Volatility is part of the game and investing is one way to outrun inflation.

Following the global lockdown in March 2020, the equities market saw a correction. In February this year, inflation fears stoked selling, sending the markets into another correction. In July, the Chinese markets dipped as the authorities tightened regulations on the education, tech and property sectors.

The chart below shows how markets have performed over a six-month period. The global equities market, for which the S&P 500 is often used as an indicator, shows an increase of 17.93%. The local market, represented by the FTSE Bursa Malaysia KLCI, showed a relatively flat return of 1.25%. Meanwhile, the MSCI Asia Pacific Index (ex-Japan) dipped by 9.11% during the same period.

Source: Refinitiv Eikon as of 30 August 2021

Many investors try to time their entry into the market, but what’s more important is the time in the market. If an investor had entered the market 20 years ago and stayed invested, they would be sitting on a positive position right now.
Source: Refinitiv Eikon as of 30 August 2021

A strategy to implement while invested is to spread your risk by diversifying your portfolio into various markets.

Investors who have taken steps to prepare their portfolios for the occasional market drops are generally better able to manage their emotions when prices dip. They can make slight changes, but only where there is a solid rationale to support this decision.

For those who feel they might have missed out on a rebound by panicking and selling early, don’t worry, you can still get back in the game.

These five steps will help you reposition yourself for an opportunity.
Stay informed
Understand the reason for the market correction. Was it a reasonable reaction or pure emotion? Get updates and advice from your relationship manager. Supplement this information with your own research from publicly available resources such as reliable news platforms. When taking information from the media, though, be mindful that a correction will attract a lot of negative media coverage. Negative news gets clicks, so be sure to carry out your own due diligence and come to your own decision with the help of your Relationship Manager.
Review your portfolio
How much of your portfolio has been affected by the recent news? Reviewing your portfolio will allow you to get a better understanding of how much of your portfolio is exposed, placing you in a better position to take the next step. Look into areas where you feel you might have too much or too little exposure.

Your Relationship Manager will help you look into potential overlapping investments to best diversify your portfolio. They can also help you calculate your combined exposure to such funds.

Together, you’ll come up with the most efficient way to rebalance your portfolio, taking into consideration implicit and explicit costs (fees, time to market etc).
Review your long-term plan/risk profile
You’ve come a long way since initially planning your portfolio. Perhaps there have been some major changes in your life such as starting a business or the birth of your first child. Are your investment goals and risk profile still the same? Your risk profile may change due to a change in your total net worth, change in active/passive income, change of number of dependents, or changes in personal lifestyle.

In addition, the more experience you gain as an investor, the more risk you are prepared to take. At RHB, our investors are required to have their risk profile assessed on an annual basis so we can offer you advice that is relevant to your needs and goals.

Based on your portfolio review, decide how you wish to rebalance your portfolio. Depending on your goals, you may wish to reallocate your investments, reducing or increasing your exposure to equities. You can control the magnitude of the market corrections you experience by understanding and carefully selecting the mix of investments. This is especially important once you get closer to retirement. Your Relationship Manager can help you assess your current risk tolerance and put together a portfolio that suits your needs, whether it be focused on equities, bonds, or a mix of assets.
Look for products that meet your investment goals
Changes in the global markets can result in some funds no longer being relevant to your portfolio. A shift in market direction or a change the fund’s investment style and/or direction, may mean that a fund is no longer in line with your preferences and risk profile.

Your Relationship Manager will help you find funds with investment strategies aligned with your objectives and risk profile. With sound research into the background of the particular investment, a correction in the price can lead to a buying opportunity. Gradually accumulating when the market is down can be a way to avoid missing out on any future rebounds. This plays into dollar cost averaging as well.
Stay invested for the long term
A correction is not necessarily a signal to sell. Even as the equity market shows minor fluctuations, long-term returns are still based on the same factors: dividend yields, earnings growth, and change in valuation. “Swing” trading, or trading on the ups and down of the market, rarely works for building long-term wealth.

If you’re still unsure, review your long-term investment goals again. There is no harm in doing so. Think of investment as an exciting ongoing journey to financial freedom.
While taking all these steps into consideration, financial experts always recommend having an emergency cash fund at hand so you can ride out the corrections without having break your momentum by making major changes to your portfolio. If the market falls, it’s always better to have cash in hand to utilise, rather than having to liquidate your assets at a loss that may not be recouped. For example, a six-month emergency fund would have been enough to ride through the market dip that happened during the lockdown of 2020, and you would still be able to enjoy the rebound.

Here are some examples of funds that have performed well and could help you strengthen your portfolio to ride out the corrections.

If you’d like to take advantage of rapid growth in certain industries in global markets and are willing to take on a little extra risk, RHB Islamic global Developed Markets Fund might suit you. If you’re risk averse and would like steady returns, the Principal Lifetime Bond fund would be a better fit, as it invests mainly in bonds that offer consistent returns over a longer timeframe. For those at the mid-point between starting their careers and retirement, perhaps funds that offer a mix of both would be a good option, like Affin Hwang Select Balanced, which invests in the Malaysian market, or Eastspring Investments Asia Select Income, which invests in the region (ex-Japan).
Source: Lipper Investment Manager as of 31 July 2021

All the above are funds with a track record of more than five years, and offer a high total return compared to their respective maximum drawdown (MDD). Then MDD is the maximum observed loss from the peak to the trough of a portfolio and acts as an indicator of downside risk over a specific period. It focuses on capital preservation, or minimising loss. A low MDD is preferred as this means that losses are small. These funds also come with a three-year Lipper Rating of 4 or 5, denoting superior consistency, total returns and capital preservation.

Your Relationship Manager is ready to help you make the most of your portfolio, so set your appointment today!


Disclaimer:
Investors are advised to read and understand the contents of the relevant Prospectus / Master Prospectus / Information Memorandum / Replacement Master Prospectus and its relevant supplement prospectus (if any) for the Funds, all of which have been registered with Securities Commission (“SC”) Malaysia before investing in any Fund. The SC’s approval and authorisation of the registration of the Master Prospectus / Information Memorandum / Replacement Master Prospectus should not be taken to indicate that the SC has recommended or endorsed the funds. Copies of the Prospectuses are available at all authorized distributors of RHB Bank. Any issue of units to which the Prospectuses relate to will only be made on receipt of an application form referred to in and accompanying copy of the Prospectuses. If in any doubt, consult your banker, lawyer, stockbroker or an independent financial adviser. Investors should consider the fees and charges involved. Past performance is not necessary indicative of future performance. Investors should not that prices of units and income distributions payable, if any, may go down, as well as up.
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