The trade war has spooked investors with the Dow Jones Industrial Average plunging by around 480 points. This was a result of the increased pressure placed on top trading partners. Markets have already been under pressure with fears of earnings waning when the next quarter results come in. Fortunately, there are ways for you to navigate these stormy waters and the best solution is to follow the 3 D’s. This is to get defense, get disciplined and get deep.
There is an old saying which states that there is always a bull market somewhere. This saying is so well known because it is actually truer than you might imagine.
There are a lot of investors who are not aware that major stocks actually made money during the 2008 financial crisis. Investors in McDonald’s were handed a return of 8.54% that year along with Walmart investors which rallied 20% on total-returns while the rest of the financial markets were in meltdown. The discount retailer Dollar Tree also saw a surge in that year of 60.8%. The one thing that these stocks all had in common was that they were defensive.
When a market turns from bull to bear, the stocks that are generally hit the hardest will be the most speculative ones. The risk-off environments which make the issues that work best for speculators are also the ones who will be hit the worst when there is a flight to quality. This means that low-interest rate environments and dividend payers will be the best way to get defensive.
This is due to the fact that dividends are a positive contributor to your total returns even when there are plunging prices. Of course, you need to ensure that you do not own stocks where dividends are unsustainable in any difficult conditions. This is due to the fact that dividend cuts will get punished when the market crashes.
After 2008, there are many investors who have remained defensive in their portfolio allocations over a prolonged period of time. By getting back to the defensive position in your portfolio, you will be able to protect yourself against the next market crash.
This will mean that you underperform during the last stages of a rally when the speculative best surge higher. However, the statistics are clear that taking less of the drawdown by being defensive will outweigh the missed upside of the full market cycle.
When the market crashes, your emotions will be your enemy. Research done by Dalbar has found that emotions cause retail investors to underperform against the averages across all timeframes. This is due to the fact that we as humans are made to buy when the asset-bubble tops and to sell when the market bottoms. This is why being disciplined will be key to surviving the next market crash.
Being disciplined means that you should hold onto good stocks even when they move lower. You should also avoid any compulsion to make speculative and risky bets to get back to even. A key part of being disciplined is to have a systematic method to quantify when an investment is worthwhile.
There are a number of tools that you can use to determine if a stock is actually attractive. The critical aspect is that the yardstick you are using should not change when the market conditions change.
The best time to buy is when there is blood in the streets. This is an investing concept that has held true for centuries and is still true today. When the market crashes, investors will generally be presented with amazing opportunities in oversold stocks. To find these opportunities, you need to get deep into the stocks’ valuations.
The market will generally overcorrect to the upside as well as the downside. This means that stocks can trade for valuations during market crashes which do not actually make sense. This was the case in 2009 when many companies were still throwing off cash despite trading for tiny multiples. By following the first 2 of the D’s, you will have enough dry powder to take advantage when you get deep.