What to do when Market Drop?? 😱

 After having one of the best month in August (+7+%), the S&P 500 is long overdue for a correction, and true enough, on 3rd September 2020 the Market saw a sea of red dragging the index back down to about -3.5% at closing, this was followed by another Panic drop on 4th September which managed to rebound by market close.

News are starting to report doomsday scenario of market possibly retesting March low! Oh my God! What should i do? Sell All position to lock in profit??

After much thought, i have came out of a detailed plan of what to do in the coming days with potential further drop!

STEP 1: 

Now this is very important, the first step when facing a market correction is:

DO NOTHING

That's right, there is nothing we need to do. Market moves in waves, wave up wave down, breathe in breathe out. Nobody can predict where the market will go in the short term, not those analyst, not bankers, fund manager, etc. 

DON'T EVEN THINK ABOUT SELLING NOW and try to get back in at a lower price. Think about it carefully, just because the market has a sharp drop (Oh no!! MSFT drop by almost 10%!?), is there ANY change to the company fundamental? Nope, that's just the way market always behave, it is irrational in the short term. Of course it is important that we ONLY invest in fundamentally great companies, because we know those companies will easily bounce back from any short term drop. If you invest in rubbish companies or penny stocks? good luck to you.

As for shorter term trades (Swing trade) which is based solely on Technical Analysis, there is nothing to do either. I had to stick to my trading system and be disciplined. i had 80% of my trades hitting stop losses causing huge Draw Down. I cannot move down my stop losses and hoping they will bounce back, no telling if they going to drop or bounce back tomorrow. Be disciplined, stick to your predetermined entry and exit point.

Step 2: BUY

Look at the value stocks you have been eyeing, are they still undervalued? if they are then it is time to open the chart and look at where the potential support levels are. Depending on your portfolio positions on the stocks, it is worthwhile to buy them in stages, If the stock drop even further?? GOOD! buy more, that's why you should always save some ammo. Of course again, i need to STRESS that those companies have to be FUNDAMENTALLY Great companies that has passed all your screening. Don't buy those hyped up stocks.

👈The advantage of buying great companies at good prices (some of my positions on 5th sept). Sure the PnL%  dropped quite a bit during market correction (total -8% drop because i was totally exposed to the massive drop by tech companies), but overall i still have quite a reasonable margin anyway. If people panic sell and the price drop further, even better! i get to buy at better price! So again, please don't try to time the market, unless you can see into the future, then please PM me.

Added some position to YUMC and MSFT at 50SMA support during the drop on 4th Sept.

And if you take a step back and look at the bigger picture, this is the 6 mth performance of the stocks. As you can see my performance is very sad compared to their 6 month performance

STEP 0: Hedging

This one i don't know how please teach me. Basically this should have been done before the correction happen. And by the end of August, we can pretty much tell the market is going to correct itself, it was a question of when. Theoretically by hedging our portfolio, we can profit or at least mitigate the losses from this temporary drop in the market. You can sell covered Call or buy protective Put

One way is to do it using VIX, the volatility index (also known as the Fear Index) which tend to spike up when market drops. I was taught that a good way is to use options on VIX. I did 2 contracts of CALL Debit Spread, but i only managed to mitigate like 0.6% of my total portfolio drop 😅. My options game is very lousy, remember?. Definitely need to learn more on options.

Conclusion:

Make sure you are holding only great businesses for long term investment!

Like this one!👇

Haha sorry i just couldn't resist showing this off. But please don't buy Xiaomi at this point of time, the price has gone parabolic and it is bound to drop back nearer to its moving average.

Calculated Xiaomi's Intrinsic Value to be about 15 HKD few months back, so i bought abit. My only regret was not buying more when it retrace back to support. I have yet to look at Xiaomi's latest earning which contributed to the massive jump in price, probably should re-calculate again.

Bonus Tips: One way to find a good company to invest in is to look around you, what do you like to use, eat, wear, etc. Listen to your wife too, you might even get some ideas on what women values most, never underestimate their judgement. 

This Xiaomi? Not the Wife recommendation. I buy lots of Xiaomi products and She always roll her eyes telling me to "Stop buying rubbish China products." So my case is different, when i like something and She disapprove, but yet she couldn't find a valid reason to convince me to stop, usually means i am on the right path. 😂