In times of downtrend: Stock market tips from the experts

Investing and trading in the stock market can be financially rewarding, but sometimes not all is well when a downtrend sets in and the inexperienced as well as the experienced investor can get caught in a heady plunge.

The benchmark Philippine Stock Exchange index (PSEi) reached an all-time high closing of 9,058.62 on Jan. 29, 2018. It has since lost 1,386.34 points or 15.30 percent to close at 7,672.28 on Friday, May 18, 2018.

What should you do when the market is down? Should you hold on to your stocks or sell below costs and take some losses?

Edward Lee, CEO of online stockbrokerage company COL Financial, has a thing or two about investing in stocks—it should always be a long-term endeavor.

“We encourage the time-tested peso-cost averaging strategy that works when you regularly invest a small amount of money in a good quality company over a period of time,” Lee noted.

“The money invested should be something that you won’t be using for ten to twenty years. That way you can avoid the volatility of the market,” he said, noting that even where there is a financial crisis the peso-cost averaging strategy still holds water.
 
“When there’s a crisis, there are more opportunities to buy good companies at a reasonable price. If you’re holding on to blue chip companies, even if the market is going down, I don’t think there’s any problem,” Lee said.

He recommends investing in an index fund, and in taking financial literacy classes, which are offered by his company.

For him, long-term investing is more important than short-term buying and selling—a strategy that only benefits 15 percent of traders.

Bonner Dytoc, technical analyst at Absolute Traders, gives a different take when it comes to making money in stocks using charts.

“Through technical analysis, I can study price movements through the use of charts, so that I can predict where the next trend will be. Because of this, I can monitor the market on a daily basis,” Dytoc said, emphasizing that he is more of a day trader than an investor.

How does he deal then with the latest market downtrend?

He turns to his charts and allows technical analysis to lead him through the daily market grind.

No hard and fast rules

“The last time something major came up was during the end of 2007, when the US charts showed that something big was coming,” Dytoc noted.

“So I tried to liquidate all ... When the global market went down for 18 months, I was able to avoid the big problem because I was able to pull out my stocks,” he said.

But when the market is down, Dytoc emphasized are no hard and fast rules to follow.

“If [the losses] are quite low, traders can choose to [sell] or ride it out if they feel that the fall won’t be bad. But, to be on the safe side, if traders are trying to get the most out of the market, they should pull out their profits before things get worse,” he said.

For behavioral economist, financial writer and certified Gallup Strengths coach Rose Fres Fausto, successful and active day trading—similar to Dytoc’s approach—require extensive knowledge of the technical aspects of the market backed by years of experience.

A basket of 30 bluest blue chips traded on the PSE and represents the general movement of the stock market, the PSEi touched a historic low of 129.52 in February 1986.

From such an historic perspective, Fausto noted the market does not go up in a straight line. “Based on historical records it really goes up,” she said.

And that’s why Fausto prefers long-term investing and believes that people should never sell at a loss.

“People are loss-averse,” Fausto said. “This means that we feel the impact of a loss twice as much as we feel the impact of a gain. When the stock market is down, there is a panic button that induces people to sell, even if their purpose in investing is for the long-term,” she said.

Fausto said that the market will eventually go up, and it can benefit people who hold on to blue chip companies or investment funds.

“When the market gets going, people find the guts to start investing. When the market is going up, they put in more money because they’re exuberant and over-confident. When the market starts going down, they become emotional,” said Fausto, who noted that market behavior is, more often than not, driven by emotions.

Do you have any tips on what to do when the stock market is down? Tell us in the comments below. —VDS, GMA News