Should you even be in the market?
After ‘kicking’ Woolworths off my trading portfolio late last year, I haven’t looked at the stock very much.
My model has signaled a long position since 11 weeks ago. And it would have given me a 3% loss since that time.
It does look like the retailer is at a cyclical bottom and its price may very well start to turn, hence my position in the stock. However, the broad market is in a bit of a crisis mode right now, so I won’t expect WOW to do much better during this time.
I wrote to New Frontier Investors readers about whether they should remain in Aussie stocks or not, given the current bear market.
By the end of 2015, the risk in the market was edging closer a level where investors may as well just get out of the market altogether.
Yes, it’s certainly a way to go. But today, I’ll tell you that my strategy is simply to reduce exposure relative to risk.
What do I mean by that?
I mean, when the risk to your portfolio gets to a high enough level, the best thing to do is to reduce your exposure to the market without completely stopping all trades.
The reason is simple. If you stop your trades because your risk has reached an unacceptable level, when would you get back into the market again?
You probably can give a very quick answer to that: I will get back in when things have calmed down and prices are picking up again.
While that is a valid strategy to calm the nerves, it’s not a clearly-defined enough.
The rebounds in a market are usually as big as the falls. This means if you get out after you were caught in the sell-off, you would miss the rebound and the chance to redeem your losses.
So what you can do is start to limit your exposure after your loss reaches a certain point. That way, you limit the potential of further losses, but won’t completely lose the potential rebound.
And always remember this philosophy about the market: the closer you are to the bottom, the higher the chance for a rebound.
How do you know if you are close to a bottom? Just look at historical data.
For China, we are close to the lower bound. For the Aussie market, losses are by no means close to the lows of the Global Financial Crisis. But it is somewhat close to the other stock market collapses in the last 30 years. This means that, unless you are expecting another GFC, you are probably wise to limit your exposure but expect a possible rebound.
Emerging Market Analyst, New Frontier Investor