The Dow Jones Industrial Average (DJIA) posted a sharp decline since 10 October 2018 and is still heading downward. DJIA is one of the major indexes in United States and its decline spells trouble. Bursa Malaysia is also affected and KLCI dropped significantly in this week.
So, does this signal the beginning of a bear market in Malaysia?
Bear market definition
Before I go on, let us see the definition of bear market first. From Investopedia,
“A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increases. Although figures vary, a downturn of 20 percent or more from a peak in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over a two-month period is considered an entry into a bear market.
(Investopedia Definition Link)”
Based on this definition, it is still too early to say that the market has turned bearish.
So the market is not bearish in Malaysia?
Although it is technically not a bear market yet (and it may turn out to be a hiccup only), we cannot deny that the market has undergone a sharp correction. KLCI has dipped below 1700 on 11 October. I doubt anyone involved in the Malaysian stock market can escape unscathed. Luckily, it recovered on the next day, albeit not to the previous level yet.
What to do in a bear market in Malaysia?
I will only give an overview of what I would do in a bear market.
First, I would not sell any of my holdings unless its fundamentals deteriorate. This is based on the belief that the price of a stock will fluctuate but its true value will prevail ultimately. Furthermore, no one can predict when a market is going to turn. If I sell in a downturn and miss the upward movement, my returns are going to be impacted negatively. This last point is explained in the book titled “A Random Walk Down Wall Street”.
Second, I am going to buy stocks that are in my watchlist when they hit my target price. If it is lower than my target price, it will be much better. When most participants are pessimistic, the share will be cheap. This is what Warren Buffett means by “Be fearful when others are greedy and greedy when others are fearful”. However, we need to make sure that what we buy are quality companies. Otherwise, the expected profits can turn into losses.
Conclusion
Though the bear market may not materialize, it is always good to have a plan to prepare for it. Downturn will definitely come and for me, it represents a good time to accumulate stocks. If we have a good plan, we will be able to collect bargains in a bear market.
What I have shared is my personal plan. But this plan might not be suitable for you due to factors like personal preferences and risk appetite. Thus, I strongly recommend you to develop a plan to deal with bear market in Malaysia. With a plan, we are less likely to be affected by emotion and act recklessly and irrationally.
