On days like Monday’s (Aug 5) dramatic selloff, which capped a three-week loss of US$6.4 trillion in global wealth, personal finance experts usually have the same advice for wary retail investors:

Take a breath. Don’t overreact. Take a moment to assess your portfolio. And depending on your situation, perhaps it’s time to put some new money in.

Still, it’s important to try to understand what’s happening and why. Because times like these, when stock markets around the globe fall sharply, are bound to come again. There’s typically a drop of 10% or more every couple of years and a slump of 25% or more every seven years, according to Zhu Hann Ng, founder and CEO of Tradeview Capital, a fund manager in Kuala Lumpur.

“It’s a good lesson and a wake-up call to realise that irrational exuberance doesn’t keep going,” Hann said.

In recent days, financial markets have shifted from confident to fearful as grim milestones pile up: SoftBank Group Corp shares plunged the most since going public in 1998 on Monday. Japan’s Topix tumbled 12%, its worst day since 1987. Taiwan’s benchmark stock index plunged by a record. Bets on AI and computer chips, recently seen as surefire, were upended. Meanwhile, the US economy seemed to wobble.

As markets rebounded on Tuesday experts attributed Monday’s meltdown to an overreaction, even as many investors still grappled with painful losses.

It can be hard to make sense of it all.

People and institutions have been betting big on different assets, including big tech companies making forays into AI. When things shift, like the outlook for the US economy worsening or the Bank of Japan moving to hike interest rates, positions must be shifted and some need to sell. Selling tends to beget more selling, especially when uncertainty swirls about matters like the upcoming US election or tensions in the Middle East.

“It is hard to know what the stress point for the selloff was,” said Rob Almeida, global investment strategist and portfolio manager at Boston-based MFS Investment Management. In effect, many investors had made big bets using borrowed money, he said, and many tried to exit at the same time.

Sudden downturns can be a good time to review your investments and weigh whether you need to move things around. Are you still comfortable holding certain stocks or funds at their current prices? Has your time horizon or capacity to endure losses - whether long or short - changed?

If you’ve made bets using borrowed money, you might want to reconsider whether that’s worth the risk. Leveraged bets can quickly lead to very painful losses when markets plunge.

“It comes down to concentration risk. We can all fall in love with everything AI but if that dominates your portfolio, you can face quite big drawdowns,” said Melbourne-based Ned Bell, chief investment officer, Bell Asset Management. “When you start to get any hint of bad news, like Nvidia potentially delaying one of its chips, you have no safety barrier.”

The general rule of thumb is to look to rotate into areas of the market that haven’t done well, such as global small and mid-cap stocks, he said.

If you do have spare money to invest, now could be a good time. “You just might potentially be able to pick up undervalued companies,” said Alex Joiner, chief economist at Australian money manager IFM Investors.

Elsewhere, the trading desk at the country’s second-largest pension fund in Brisbane has put in some “fairly long hours” in the last few days. Australian Retirement Trust chief economist Brian Parker said the pension fund, which manages about AU$300 billion in savings, bought the dip in Japanese and Eurozone shares while selling government bonds.

“If you do have some spare cash, does this mean that there’s some potential buying opportunities on the horizon? Yeah, quite possibly,” Parker said.

“The pullback has created some good opportunities, particularly in equities,” Guy Stear, head of developed markets strategy at Amundi Investment Institute, wrote in a note. Japan and some European markets look attractive as they have given up gains for the year even as earnings have so far met or exceeded expectations, he added.

Zhikai Chen, head of Asian and global emerging-markets equities at BNP Paribas Asset Management, said Chinese valuations are cheap and that the Asian tech hardware sector has good upside.

Things either calm down or they don’t. But as stocks roared back, many experts said that Monday’s selloff was uncalled for, while cautioning that markets could remain volatile for a while.

“The market reaction was a bit extreme yesterday,” said Rupal Agarwal, Asia quantitative strategist at Sanford C Bernstein. There’s still uncertainty about whether a recession is coming, whether companies can keep up their profits, and how things will play out in the Middle East, she said.

It’s worth noting that many economists and investment chiefs say the US economy is still strong and poised to avoid falling into a recession in the near term.

Hann, the fund manager in Kuala Lumpur, said the good returns in Malaysian equities had set him up for taking some time off in October.

“Now, suddenly, this threw things into a mess,” he said. “But I still should be on track for a holiday if the market stabilises.”

  - Bloomberg