At some point of investment, you may face a high-anxiety situation. If you not sleeping at night because you are worried sick about your portfolio and you are on the brink of making an emotional decision to ” Sell it all!!” then action needs to be taken. Here is some guidance on what you could do:-
1 Do the math:-
Calculate the amount of income you are getting from your current investment. The income coming from you investment generally does not go down even though price does. Stocks and bonds continue to pay dividends and interest. When your annual expenses can be covered by the cash flows from dividends, interest and outside income, it makes it easier to ride out a bear market. This “income reality check” helped many investors through the 2008 bear market.
2. Reduce the exposure
If the income reality check does not put you at ease and you are still worried sick about the future of your portfolio, then it means you held too much exposure and need to permanently reduce it.
How do you do that?
Lower your equity position by 10 percent. For example, if you are of 60 percent stocks, go to 50 percent. If you are at 40 percent stock, go to 30 percent. A 10 percent reduction in equity usually reduces investor anxiety long enough for the stock market to recover. Once the 10 percent reduction in stock is completed, keep the allocation as is through the bottom of the market and beyond. Don’t go back to the higher risk level because you may be setting yourself up for another emotional sell during the next bear market. This small reduction will likely have only a small effect on the long-term return of your portfolio and a huge effect on your short term psyche.
3. Reduce some more
If you still having an emotional reaction after a 10 percent stock reduction in your portfolio, then you still have too much risk. Reduce your portfolio by another 10 percent in equity. This should give you time to think clearly and get past the bear market. Once you get to this level of risk, stay there, even when the market recovers.
By all means, do not sell because you are experiencing panic if you cannot stand the heat anymore. Emotional investing is a lose-lose proposition. Panic sellers almost always surrender near a market bottom in prices and then they lose again when they don’t get back in during the recovery, and then once more because their own action creates a life long bias against KLSE, banking, and Malaysia economic system.
This is not a good way to invest.