Some investors may try to find value stocks in countries which have fallen heavily in one year. However this is always not the wise strategy. Simply because the equity market has declined a lot in one year does not mean the market will produce high returns the following year. This is not only true at the country level but also at the individual equity level. For instance, a stock that has plunged by 90% or more does not mean it is a value stock and it also does imply that the stock will bounce back sharply the next year. If this were to happen, all one has to do is find stocks that have declined 90%+ and just invest in them.

According to an article by Michelle Gibley at Charles Schwab, countries that have performed poorly in one year do not necessarily become winners the following year. This is true for both developed and emerging markets.

From the article:

Does it ever make sense to invest in a country’s stock market specifically because it has had a bad year?

With markets getting off to such a rough start so far this year, some investors may be on the hunt for buying opportunities among the global laggards. The idea is that focusing on the poorest-performing stock markets might be a shortcut to finding value. After all, picking up an asset after it tumbles can be a way to take advantage of any future rebounds.

Unfortunately, it’s not that easy. Here’s why.

Poor performers may not bounce

First of all, just because a country’s stock market ranks among the worst performers in a given year doesn’t mean it’s destined for a comeback the year after. In fact, Schwab data covering the past 15 years shows that the worst-performing market in any given year often struggles the next year.

Among developed-country markets, a year at the bottom of the league tables meant continued weakness the year after 63% of the time. Emerging market stock markets fared slightly better, with one bad year leading to another 56% of the time.

Stretching the time horizon out didn’t necessarily improve things. Among developed markets, 64% of losers continued to underperform over the following three years, while 43% of emerging market-losers lagged.

Using Portugal as an example of the developed markets, equity markets there fell by 38% in 2014. The next year it fell again with a loss of another 38%,The same scenario played out with the Greek market in 2010 and 2011.

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Here is the table for emerging markets:

Source: 2016 International Investing: Why Laggards Don’t Necessarily Produce Winners by Michelle Gibley, Charles Schwab

Greece appears in both the charts since it was downgraded from a developed market to an emerging market by MSCI. Argentina stocks lost 4% in 2007. The next year was even worse with a loss of another 54%.

Similar to the Callan Table for equities, the Periodic Table of Commodity Returns is also a valuable tool for analysis and review of performance of a variety of commodities.

The Periodic Table of Commodity Returns For 2015 is shown below. With the major decline in crude oil and other commodities this chart is especially interesting to review.

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Source: US Funds

The worst performing commodity last year was Nickel followed by Crude Oil which plunged over 30%. Gold fell just over 10% relative to oil.

Download: The Periodic Table of Commodity Returns For 2015 (in pdf)

Also checkout: The Collapse of Commodities in One Simple Chart (Visual Capitalist, Nov 2015)

Equity markets worldwide are very volatile so far this year.Most of the markets have declined significantly in just two weeks.The S&P 500 has already fallen 8% year-to-date. Every day stocks seem to go nowhere but down.Despite all the doom and gloom, it is wise to follow the course and stay strong.

That being said, here are five things an investor can do during volatile market conditions:

1.Stay calm and carry on: Markets always go up and down for a multitude of reasons. There is no reason to panic when markets go down such as the current correction. Instead of worrying about the day to day market movements, investors can simply stay calm and do nothing. Sometimes doing nothing is the best action one can take. It is especially important not to sell stocks as prices are at lows now.

2. Avoid suspending automatic dividend reinvestment (DRIPs): During market crashes dividends that are automatically reinvested grow more as an investor to accumulate shares cheaper. Seeing the market go down everyday one may be tempted to suspend or cancel dividend reinvestment immediately. This is a wrong move to make. During the 2008-09 financial crisis, suspending dividend reinvestment cost me dearly as I missed out on the following dramatic upturn by not picking up stocks at their lowest.

3. Deploy cash, if possible: Many high-quality companies are also getting trashed with the overall market. Investors with a long-term horizon of at least 5 years can deploy cash if available and add additional stocks to their portfolios.

4. Roth IRA Conversion (for US investors only): Investors can transfer stocks that have declined heavily in their traditional IRA accounts to their Roth IRA account for this tax year. Since taxes will be due only on the price at the time of conversion, one can benefit greatly when filing taxes next year. For example, if a stock with a cost basis of $100 per share is now trading at just $50, converting this stock from the traditional IRA to a Roth account, one would pay taxes on the cost basis of just $50 per share and not the original cost basis of $100. Since Roth IRA is the best in terms of taxes and saving for retirement this is one strategy that investors can easily follow when stocks crash.

Also see:

• Tax Tips for a Down Market, WSJ, Jan 22, 2016

5. Stay away from commodity stocks, ETFs, etc: Most commodity stocks such as mining and metal stocks have plunged 50% or more in the past year or so. They may look cheap with low share prices. However it is wise to stay away from the commodity sector at all times. Investing in all types of commodity firms or directly in commodities such as copper, soyabeans, pork bellies, orange juice futures, iron ore, etc. is not suitable for most retail investors. In fact, there is no need to invest in commodities at all. Commodities are prone to extreme volatility and no body knows how long crude oil can go, for example. Just a few years pundits were predicting $150 or even $100  per barrel. Now some are predicting $30 or even $10 per barrel. Instead of trying to pick up “cheap” mining stocks investors are better off adding stocks in the energy sector like integrated oil companies.These firms have the ability to continue dividend payments despite lower oil prices and share prices can jump should the oil prices recover.

In summary, it is important to stay focused on the long-term goals and not make decisions based on emotions. Trying to predict the price of crude oil or when China may start consuming zillions of tons of copper, coal or iron ore is simply foolish. Since those things are beyond an individual investors’ control, it makes sense to focus on things that are under the investors’ control. The ability to sit tight as markets turn blood red all over and not following the herd are squarely within the control of ordinary investors.