Best Defensive Techniques During Stock Market Recessions
   Updated: 2020-03-13T05:37:21Z
    minute read

As the WHO declared the COVID-19 a pandemic, the result to economies were catastrophic. The stock markets around the world felt the effect, and a sharp downturn has happened.

Best Defensive Techniques During Stock Market Recessions
"stock-exchange-world-economy-bull" by geralt is licensed under CC0

The US Stock Market downturn is similar to 1987's Black Monday. The Philippines, suffered also a severe blow when PSEi drops to 5697 points, the lowest since 2012. The announcement yesterday of having the NCR on a community quarantine/lockdown the index slid even more.

Big Investment companies are taking advantage of the sell-off by releasing some of its position to trigger a price fall, in order for the retail investors (individuals) to sell also. When the price reaches their target, these same companies will then buy the shares. After that, the process repeats. This may be just a speculation, but that is how I understood it from my perspective.

I am just an individual investor/trader, fighting off the market alongside with big fund companies. At the end of the day, the small players are the ones losing a lot of money.

To mitigate this problem, you can do a few things:

  1. Cut your losses
  2. Average Down
  3. Hold

Cutting your losses is easier said than done, this is specially the case if you were caught off guard by the stock market recession. However, since we do not know when COVID-19 will slow down, it is expected that market will continue its downward movement.

Average Down this is more of a logical step if the stock is fundamentally sound. If you believe that, the stock will weather out the storm, then by all means average down. However, there are drawbacks:

  1. We don't know if we already hit rock bottom. Example, you bought shares today to average down and by next week, the price slid even more.
  2. Your available buying power. If you are fully deployed, then averaging down is not an option, not unless if you are going to cut your losses to other positions.

Hold is the same as going down with a sinking ship. If a stock is fundamentally shaky, then holding the stock can be difficult and stressful. But if you believe that the stock will eventually bounce, then holding can be a sound solution. Be aware though that a several days of losses can take years to recover.

I've experienced all these three stages. Several years and losses later, I've managed to distanced (at least) my emotions with the Stock Market. So, when the pandemic and lockdown was announced, I've at least prepared myself of doing the first option, which is to cut my losses.

It is much better to stay in the sidelines for now. Let us wait for things to calm down and start buying again when it comes around.

I’ve chosen option 1, which is cutting my losses. What did you choose? Let me know you perspective in the comments below.

"Never invest emergency savings in the stock market."
Suze Orman

- Your Life In Perspective by Ælfræd (Elf Counsel)

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