We all worry about money. It is easy to understand why one would be worried about having little or no money. But, we also worry when we have money. This is especially true if our money is invested in the stock market and there is a market crash. In 2020, during the 1st wave of the COVID-19 pandemic, stock markets crashed dramatically and caught most investors unawares.
While a crash in stock markets or a market correction is impossible to predict, there are various strategies that investors can utilize to minimize its impact on their investment portfolio.
In this blog, we will discuss five ways to cushion the impact of the market crash on your portfolio.
Don’t Sell in a Panic
Whenever the bears wreak havoc on the stock market, you may think of pulling out the money and folding in your losses. However, a bull rally can correct the stock market crashin no time. The stock market has always recovered well, no matter how impactful the crash.
Instead of panic selling, therefore, you should focus on long-term investment. That’s the only way you will reap good rewards.
Ignore the Market Sentiments
Amateur and nervous investors can engage in panic buying and selling during volatile markets. Sadly, their mass panic is palpable. So you may end up doing FOMO investing and losing sight of your investment goals.
It is better to trust your research and the history of stocks at such a time. They can help you navigate the market turmoil far better.
Buy the Dips, But Pick Wisely
This goes without saying, but you should keep some funds handy for shopping during bearish runs. Think of a crash like an end-year sale from your favourite brands.
You can invest in high-performing mutual funds and equities at a reasonable valuation. It is also a good time to buy more from your winning investments. However, do so after due diligence. Keep a list of quality stocks handy. Adding blue-chip or dividend stocks to your portfolio is also a good idea, as they have built time-tested economic moats.
Not Every Company on the Radar Deserves Your Money
If you are going to buy on dips, pay special attention to stock selection. Don’t fall for the market narratives without proof. Look out for factors like EBTIDA, cash flows, capital allocation, valuations, profit made, among others.
You also want to avoid investing in internet-based companies. Or companies having massive commodity influence as they are challenging to work out.
Better to Stay Still
The jitters in the equity market may make you anxious to take some action. However, as history goes, the changes are often short-lived. They are not powerful enough to alter a company’s situation. So you are better off laying low and waiting for the next rally of bulls.
Bottom Line
In the world of the stock market, corrections come like seasons. So if you’re new to the scene, we recommend building some bear market strategies using the tips above.
We all worry about money. It is easy to understand why one would be worried about having little or no money. But, we also worry when we have money. This is especially true if our money is invested in the stock market and there is a market crash. In 2020, during the 1st wave of the COVID-19 pandemic, stock markets crashed dramatically and caught most investors unawares.
While a crash in stock markets or a market correction is impossible to predict, there are various strategies that investors can utilize to minimize its impact on their investment portfolio.
In this blog, we will discuss strategies that investors can utilize to minimize the impact of a stock market crash on their investments.
During market corrections, selling off your investments might seem like a good idea. Negative news such as a pandemic, an asset bubble that’s about to burst, scams being revealed, etc., can influence any investor.
Moreover, in 10 years out of the 20 years, the gap between the best and worst performance days of the NIFTY 50 was less than a month.
This is the key reason why the strategy of timing the market does not work well for most regular investors. The key thing to remember is that fear leads to panic, especially among amateur investors. This panic often makes investor sell their investments at low prices during a stock market crash.
But historically, markets have always recovered from a crash and instead of selling in a panic, you should just stay calm and allow your Systematic Investment Plans (SIPs) to continue. If you manage to continue investing irrespective of market conditions, you will reap the rewards when the markets recover at a later date.
Resist The Urge To Make Panic Buys
Similar to making panic sales during a market crash, it is also important that you do not make panic buys during a market crash. Panic buying can be described as a state of mind that pushes you to make investments indiscriminately, which can become an obstacle to reaching your current investment goals.
After all, when markets are down, it often seems the best time to invest at reasonable valuations. In such cases, investors often invest in Bluechip stocks or purchase Index Funds.
However, many investors forget one key aspect of Equity investing in such cases – their risk appetite. The buying frenzy when markets tank can lead investors to invest in Equities well beyond their actual risk appetite.
So instead of panic buying, you should plan for these investments before markets actually tank. But to do this, you need to know how high or low your risk tolerance is. Only then will you be able to accurately decide how much of your existing portfolio can be moved from low-risk assets such as Debt Mutual Funds and Fixed Deposits to higher-risk assets such as Equity Mutual Funds.
Keep Your Portfolio Rebalanced
Portfolio rebalancing is a strategy that helps in reducing the overall risk in your investment portfolio to provide better risk-adjusted returns on your investments. This strategy involves buying and selling investments periodically so that the weight of each asset class is maintained as per your targeted allocation.
So, the first step in rebalancing your portfolio is to have an asset allocation strategy in place. If you don’t have an asset allocation plan in place already, a stock market crash offers you the perfect opportunity to take stock of your current investments. Some key factors to consider when assessing your current investments are:
• What am I invested in – Mutual Funds, Stocks, Bonds, Gold, etc.
• What is the value of my investments?
• What are my financial goals?
• What do I focus on when building my investment portfolio – consistent returns, growth of capital, etc.
Once you have answered these questions and have a target allocation in place for different asset classes, you can accurately figure out your current situation. Then you can decide which investments you need to buy or sell to reach your asset allocation target.
If done right, rebalancing your portfolio will not only help you stay on course to reach your financial goals but also help manage overall portfolio risk when markets are volatile. That said, it might not be a good idea to rebalance your portfolio in the middle of a stock market crash. You should instead consider letting markets settle down a bit before rebalancing your investment portfolio.
Take Advantage Of Tax Laws
The profits generated by selling Mutual Funds or stocks are called Capital Gains, and these are subject to Capital Gains taxation rules. A fall in the stock markets can be an ideal opportunity to increase the post-tax returns on your investment by using a technique called tax-loss harvesting.
Tax-loss harvesting involves selling your Mutual Funds or stocks at a loss so that you can accumulate a capital loss. This capital loss can then be offset against capital gains from other investments to reduce your tax burden and increase the post-tax returns from your investments.
The tax loss harvesting technique is commonly used by investors towards the end of the Financial Year, i.e., in the months of February and March. But this is not a hard and fast rule, so that the technique can be used at any time during a financial year. A market crash offers the perfect opportunity to book a capital loss by offloading some of the poorly performing Mutual Funds or stocks in your portfolio and replacing them with potentially better performing investments.
Investors can also take the advantage of tax-loss harvesting when they are rebalancing their investment portfolio. This can significantly reduce your annual tax liability while simultaneously improving the asset allocation mix of your investment portfolio.
Protect Your Personal Finances
A stock market crash impacts a lot more than just the value of your investment portfolio. In fact, financial markets can also affect employment, the Real Estate Market, consumption of goods, inflation, and much more. Thus stock market turmoil can have a different impact on different individuals, but there are a few things that you can do to minimize this impact.
• Create a Personal Cashflow Statement
A cash flow statement is a record of all the money that is coming in and going out on a daily basis. By maintaining a personal cash flow statement, you can organize your finances better so that a stock market crash does not impact your ability to take of essential expenses such as utility bills, rent, tuition fees, etc.
Moreover, accurately tracking your expenses can also help reduce extravagant and often unnecessary expenses such as expensive dinners, unused gym memberships, spa treatments, etc.
• Create an Emergency Fund
Another way to protect yourself financially in case of an emergency is to create an emergency fund. In case you do not have an emergency fund yet, you should start one immediately. If you have an emergency fund already, a stock market crash is an ideal trigger to consider topping up the fund with an additional amount of up to 2 to 3 months’ expenses.
• Manage Your Debt
As a rule of thumb, a stock market crash is not the best time for taking on additional debt. If you do so, you run the risk of becoming caught in a critical economic situation. Moreover, a correction in markets might also be an excellent time to refinance existing debt such as a Home Loan, Personal Loan, or Credit Card, especially if you have a good credit score and have paid your EMIs on time to date.
Invest in Equities But Choose Carefully
While Equities are cheaper when stock markets tank, it is essential to be careful when making these investments. One way to benefit from the lower cost of Equities is to change the allocation in long-term investments such as National Pension System (NPS) and Unit Linked Insurance Plans (ULIPs). Both NPS and ULIPs are long-term investments with multi-year lock-in periods.
A stock market crash provides you the perfect opportunity to increase your Equity allocation at a reasonable cost and allows you to switch to a more aggressive asset allocation from a comparatively conservative allocation. This is because Equity investments, especially when purchased at low valuations, have an unmatched ability to boost your investment returns for long-term goals such as retirement.
You can also consider purchasing Equity Mutual Funds and stocks when valuations are low during a market crash. That way, you might be able to generate significantly high returns when markets recover at a later date. For example, if you consider the broad-based NIFTY 500 Index, you will see that this index has gone up by 75% in the previous year, which is substantial. But you must make sure you do sufficient research when selecting individual stocks to invest in.
This is because, when markets recover from a crash, not all stocks give good returns. In fact after the market crash of 2020, many popular names such as Yes Bank, United Spirits, Abbott India, and Bharti Airtel have given negative returns till date.
So, if you plan to make Equity investments during a market correction, make sure you do adequate research. But, if you do not know how to value stocks or don’t have the time to research investment options, it might be a better idea to invest in professionally managed diversified Equity Mutual Funds as compared to investing in individual stocks.
Focus on Making Long-Term Investments
When stock markets tank, a few questions come up every time:
• Will the stock market go down to zero?
• Will the economy recover?
• Can stock prices increase from here?
Every time the answers are the same – the stock market does not go down to zero, the economy always recovers, and stock prices go up, reaching new all-time highs.
While short-term volatility is inevitable when you are investing in Equities, how this volatility affects you depends solely on you. If you are investing for the long-term, these ups and downs in the stock market should not bother you.
So if you are investing for the long-term, you should keep a level head and not pay too much attention to market movements. Instead, focus on your behavior by doing the following:
• Resist the urge to engage in panic buying and selling
• Make sure your portfolio is rebalanced, and you are taking advantage of tax laws
• Protect your cash flows
• Understand that volatility is an integral part of the investment process, and there will be many more market corrections in the future
Bottom Line
A stock market crash offers investors a unique opportunity to grow their wealth. But to take advantage of this crash, you must have a plan in place before the crash happens. The 7 strategies discussed above are designed to help you not only weather a market crash better but also make sure that you can grow your wealth significantly when markets recover at a later date.
Investors, like most people going about their daily lives, don’t like doubts and uncertainties – like the Covid-19 pandemic, or the Russia-Ukraine crisis. So, we would anything we can to avoid it.
Of course, it’s a good idea to avoid entirely what you can’t totally get your mind around, successful investing is largely about dealing well with uncertainties.
In fact, uncertainties are the most fundamental condition of the investing world.
Seth Klarman wrote in Margin of Safety –
“ Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen.
Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.
What Klarman suggests is that if you need reassurance and certainty, you’re giving up quite a bit to get it. Like high fees to experts who would predict the future (which you falsely believe as certainty, which it isn’t), or expensive prices for stocks (because everyone knows their future is clear, which often isn’t).
On the other hand, if you can get in the habit of seeking out uncertainty, you’ll have developed a great instinct. Plus, in the long term, it’s highly profitable.
Mohnish Pabrai wrote in his brilliant book The Dhandho Investor –
“ Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The Street just hates uncertainty, and it demonstrates that hate by collapsing the quoted stock price of the underlying business. Here are a few scenarios that are likely to lead to a depressed stock price:
High risk, low uncertainty
High risk, high uncertainty
Low risk, high uncertainty
The fourth logical combination, low risk and low uncertainty, is loved by Wall Street, and stock prices of these securities sport some of the highest trading multiples. Avoid investing in these businesses. Of the three, the only one of interest to us connoisseurs of the fine art of Dhandho is the low-risk, high-uncertainty combination, which gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much!
While value investors are typically averse to taking high risks, that’s more a reflection of the price they’re willing to pay for any given investment than the types of situations they most often pursue, which are often fraught with uncertainty.
As businesses constantly evolve and change in response to challenges and opportunities, the lack of clarity around those changes. And the risks inherent in the potential outcomes can cause share prices to diverge widely from underlying business values.
The ability to recognize and capitalize upon that dynamic, and understand whether it’s temporary or permanent, is a key element of what sets the best investors apart.
Let’s have a look at how portfolio rebalancing works. In a word, rebalancing is selling one or more assets and reinvesting the proceeds to reach your target asset proportions. In order to realign your asset allocation with your risk tolerance, you would either sell some of your stock investments and transfer the money into bonds or buy more bonds or any other asset class in the portfolio.
Why is balancing and rebalancing a portfolio so important?
The goal of portfolio balancing is to attain your ideal risk and return potential proportions in your investment portfolio.
When you first design and commit funds to an investment strategy, that is known allocating your assets. As a simplified example, you may want to have 70% of your portfolio in stocks and 30% in bonds. When you initially fund your portfolio in this manner, it would be what you consider a balanced portfolio.
The issue is that these proportions in your portfolio do not remain constant over time. Let’s imagine the stock market doubles in value in five years, while the bond market rises at a slower rate. The value of the equities in your portfolio would outperform the value of the bonds, putting your investment portfolio out of balance dramatically.
You can and should rebalance your investment account to maintain a balanced portfolio over time. If your original risk tolerance spurred you to invest 70% of your money in stocks, then your rebalanced portfolio should be 70% stocks once again.
Which rebalancing method is ideal?
Option 1 : Sell high-performing investments and buy lower-performing ones.
Option 2: Allocate new money strategically. For example, if one stock has become overweighted in your portfolio, invest your new deposits into other stocks you like until your portfolio is balanced again.
You may prefer the second option because rebalancing in the “traditional” way — without investing any additional money — requires you to sell your highest-performing assets. We’re generally fans of the second option since rebalancing by contributing new funds enables you to leave your winners alone to (hopefully) continue to outperform.
Determining how a balanced portfolio looks for you
Unfortunately, there’s no perfect method of determining your ideal asset allocation in a balanced portfolio.
One method of determining the best asset allocation for you is called the Rule of 110. Subtract your age from 110 to determine what percentage of your portfolio should be allocated to stocks, with the remainder mostly in bonds. For example, I’m 39, so this means that about 71% of my portfolio should be in stocks, with the other 29% in bonds.
You can use this method, but it’s also important to consider your individual situation. For example, if you consider yourself to be a risk-tolerant person and short-term market fluctuations don’t bother you, then your balanced portfolio could shift a bit in favor of stocks. On the other hand, if stock market volatility keeps you up at night, then you can err on the side of caution by allocating more money to bonds or even to cash. A portfolio that is balanced for me may not be — and is probably not — balanced for you!
When should you rebalance your portfolio?
Once you’ve determined your target asset allocation and have created a balanced portfolio, the next logical question is, When should I rebalance my portfolio?
There are two basic approaches to rebalancing. You can either rebalance your portfolio at a regular interval (such as once a year) or just when it becomes plainly unbalanced. There is no right or wrong way to rebalance your portfolio, but once or twice a year should do unless your portfolio’s value is exceptionally volatile.
One big advantage of portfolio rebalancing for long-term investors is when market values plummet, our tendency is to liquidate our holdings before things worsen. And, when market prices appear to be rising and “everyone” appears to be making money, that’s when we want to invest. This is natural human behaviour, yet it is the polar opposite of buying low and selling high.
One of the most significant advantages of having a balanced portfolio over time is being compelled to sell high and purchase low. For example, if the stock market falls and equities lose 30% of their value, your bond allocation is likely to become excessively high in your portfolio. Selling some of your bond investments and buying equities while they’re cheap could help you restore balance to your portfolio. Having a well-balanced portfolio and taking steps to maintain it can help you avoid depending too heavily on emotions when making key investing decisions.
No matter how hard you prepare, there is also some impact on your investments when the stock market crashes. A lot of experts list things to be prepared for when the stock market crashes but what after it does? There are not many experts who have listed foolproof solutions. Not everyone is patient or financially stable until the stock prices go back up again and, in such situations, the pressure is quite high. To start off, we suggest you take a deep breath and relax your body and the second step would be to check out the checklist below that will help you with what to do when the stock market crashes.
Nothing – If you are a long-term investor
The first and foremost thing to do if you are a long-term investor is do nothing. A long-term investor has less to worry about the stock market situation as it doesn’t impact them with major hits. The reason for this is simple, the stock market’s volatility; if the market is on its knees today, in the coming few days, it will be up in the sky again. It is best to do nothing as a long-term investor as the wave continues to flow with both upward and downward thresholds.
Additionally, it is an open window to buy more stocks for long-term investment as the prices are on the downward threshold. This way, you can book more profit for the future by spending only a little during these times.
Invest only as much as you can after saving enough for the next 5 years
A stock market crash is no good news for the short-term marketers and it is always disturbing. The common reason for this is the money involved in the market is actually the money taken as a loan or by submission of entire assets. We do not recommend any marketer to invest money in the stock market without saving enough for the next 5 years.
A stock marketer needs to be intelligent and know the stock market’s volatility. Blindly investing in the stock market is no good and will ultimately lead to heavy losses. If you are investing in stocks today, ensure you have enough fuel left if the money is taken away. A trick that I personally use is to invest certain money in the stock market which is meaningless to me. So, even if the money is drowned tomorrow, I am still running with the regular stream of income.
Diversifying Income Portfolio
As a clever marketer, one should also build assets outside the stock market that can ensure continuous money flow even when the stock market crashes. Diversifying the income portfolio can reduce the impact of the stock market crash. We suggest you build more and more assets when the stock market is working in profits for you. A continuous running stream of income ensures you are financially stable even after the stock market crash. Start today and build a strong and more diversified income portfolio excluding the stock market. As the saying goes by Warren Buffet, “Don’t put all your eggs in one basket,” we suggest you do the same, be diversified.
Buy More Stocks, if you can
There is a perfect opportunity to buy more stocks when the market crashes. If you have saved enough and have other assets that generate income for you, this is the right time to buy more stocks. The reason for this is simple, a stock market crash signifies all the prices are down and this is the perfect opportunity to buy low and sell high.
We all know the thumb rule of the stock market, buy low and sell high. In the case of a stock market crash, you can buy more short-term and long-term stocks that will book profits when the market is up again. But are you going to buy the stocks blindly because they are at a low price? I bet that would be a mistake. We get it, the stock market crash is luring investors who want to buy more but that does not mean you can buy stock blindly. Here, as a stock marketer, one needs to have patience and solid research of the company. This research includes important data such as the estimation of how long it will take the companies to raise the stock prices by giving a great performance if the expense ratio and other statistical data point the investors in the right direction and if the stock market crash has, directly and indirectly, impacted the company in a way that can disturb the performance of the companies.
After all of the above is taken into consideration, one can invest and book more profit after the stock market crash. However, all of this hard research needs to be done in minimum time before the stock market crash impact is reduced and the prices rise again.
Get more long-term investments
This is a perfect opportunity to invest in long-term stocks is right when the market is hit the rock bottom. The reason for this is simple, long-term stocks that last for over 10-25 years yield more profit because of the indirect impact of deflation and high-profit margins. You must be wondering how deflation can be one of the reasons for higher profits, the reason is what you invest today will hold lesser value in the coming 10,12,15 years because of the deflation, and that time, the investment may be considered minimal but the profits will be much more in numbers.
Final Words
We understand stock market crashes are disheartening but to make a wise decision is all it takes along with patience. If you can, buy more stocks after the crash and look into investing in long-term stocks. The stock market is volatile, if it is rock bottom today, it will also rise in the near future.
Markets are like Cardiograms. Just like ups and downs on the cardiogram are necessary, markets are not meant to be linear. Not everyone has been able to make the best of the market cycles. However, smart investors not only leverage on the bull market they also smartly benefit from the bear market. It’s not always about making a good investment; it’s about making a smart investment during the market correction. Let us familiarize you with 5 key behaviors of smart investors.
Greed in the time of panic
“Be fearful when others are greedy. Be greedy when others are fearful.”
For a smart investor, corrections are times to be greedy, because this is the time when smart investors find many opportunities to invest rather than selling off their winnings in selling spree. Smart investors leverage on the greed of buying stocks at reasonable price. While others choose to sell, smart investors invest more in the time of market panic. Buying in the times of correction is one of the identical features of smart investors.
Opportunities to analyze more quality stocks
“Good things are found in the depth.”
Smart investors are opportunistic. They seek opportunities for quality companies as market corrections bring down the average cost price for the quality stocks. This means there is a higher opportunity to multiply the number of stocks at a fair value at such times of correction. They rather find opportunities in critical situations than to surrender their winnings in equity. Quality companies have higher growth potential and smart investors execute their expertise to spot one. Quality companies tend to have limited downside during the corrections and they help keeping portfolio strong. Smart investors dive deeper even in the volatile markets to find such quality catch.
Knowledge first
“An investment in knowledge always pays the best.” Smart investors make their decisions with a supported knowledge base. They trust only the facts and ignore the market rumors. Such investors merely run on luck, they believe in knowledge and research as it is the base of investment in equity. Smart investors avoid churning portfolio often because their portfolios often consist of quality stocks that have limited downside in such times. This helps them avoid cost for churning their portfolio. Markets have never been stable but only the smart investors learn how to make the best of it. Knowing the market trends is smart investor’s characteristic but they don’t necessarily follow.
Buy right: Sit tight
“Big money is not in the buying or selling, but in the waiting.”
Smart investors invest in equity for a long term as they believe in wealth creation by investing in quality stocks that possess a growth potential over the long period of time. Keeping ears to ground and holding the stocks till the full growth cycle of the company, smart investors benefit from the period spend in growth of the company. Being hasty in selling quality stocks is never a choice of smart investors. They believe in fundamentals to achieve financial goals over the long term therefore market corrections do not lead them into panic. During market correction, they prefer to sit tight on their holdings.
Evaluating performance of portfolio
“Look back to see forward.”
Smart investors plan for longer term before they invest. Market crash enables smart investors to evaluate their plans. They evaluate the performance of their stocks as how much has the stock risen up since the investment with respect to the fall experienced in the correction. They calculate possible value of their portfolio in the bear market with the caliber of stocks in the portfolio for the period to stay invested. They urge to invest more in quality companies for higher opportunities and higher expected returns. They don’t change their plans, they just refresh the existing plans. Above all smart investors do not simply risk money to test their luck, they invest money to systematically create wealth over a long period of time.
While there are many reasons why a person might invest in unlisted shares the following are some of the common advantages of owning unlisted shares:
1. High-value investments: Since the shares are not very liquid, they are often either undervalued or overvalued for long periods.
Thus, if an investor can invest when the shares is undervalued, then he/she can gain significant returns on the investment.
2. Diversification of risk: Unlisted equity shares are a different asset class by themselves and as a result offer some diversification of risk for investors who are majorly invested in listed equity markets.
3. High growth investments: Often unlisted firms are smaller in size and are yet to reach a stage where they can go public to avail funds for their capital requirements.
As a result, investing when the company is small and invested through its growth when it lists on equity markets often yields high returns due to the small base effect.
4. Peace of mind: Unlike listed equity shares, the prices of unlisted equity shares are relatively stable and the investor need not worry about fluctuations in prices.
The markets are high and they look overvalued. Many are worried about the expensive markets. But the bigger questions that investors must ask, are the following.
1. If it falls, then by how much?
2. What if it does not fall much; i.e., what if it is a time-bound correction and not a price-bound one?
3. ‘When’ will it fall?
Now, let’s apply this logic to the stock market. A lot of investors are in a dilemma: ‘should we book profits for now and enter again when the market falls?’
Let’s say you execute this thought and sell all your investments today with the plan of entering the market again when it falls.
And let’s assume your decision is proved right and the market falls drastically in the next few days or weeks.
If that happens, it is not good news. This is because if you are proven right in this decision, you will do it again in the future.
That is, you will ‘time the market’ again and again. And this is a bad habit. If you time the market 10 times in the next few years and you are wrong just 3-4 times out of 10, you may still lose money overall, forget about making great returns.
Check the records of successful investors. Do they follow this practice? If not, why? If they cannot or do not predict the market, what are the chances of you being right?
We have to be careful about the kind of actions we take, as they will become a habit. If this habit is a bad one, it will be very tough to leave it.
Now, let’s see if we can answer the three questions asked earlier.
1. What if there is only a time-bound correction?
Correction can be price-bound, the way we had in 2008 and March 2020. And it can be time-bound as well. That is, the markets remain in a certain range for a very long time.
Examples:
1) From July 2009 till December 2011, again, the Sensex was range-bound. After moving in a range, the market started moving up again in both cases. If that happens again in the next few months or years, your plan to enter at low values may never fructify.
2) From December 1993 till February 1999 (for more than five years), the Sensex was range-bound between 3000 and 4000 levels.
2. If it falls, then by how much?
Did you invest a huge amount in March 2020? No? Maybe because you were waiting for the markets to fall more. We, as humans, have this deep desire to buy at the lowest level.
And who tells you where the bottom is? TV experts, your advisor, neighbors, colleagues, or friends?
Investing at the lowest point and exiting at the top is a matter of luck, not research. Therefore, the best strategy is to invest at every level. Even at today’s level in January 2021.
In a nutshell, make sure you are conscious of the habits you develop while investing in the stock market. This is what differentiates a successful and not-so-successful investor.
3. ‘When’ will markets fall?
I know investors who sold their portfolios in July 2020. The market had recovered significantly from its March lows and economic activity had hardly started.
Logically speaking, it was the right call. Many investors and experts were expecting the market to fall again.
We are in December 2020 now and we all know what has happened from July onwards. It is not about being ‘logically right,’ but about developing the right habit.
I also know a few of these investors who entered the market again in September-October 2020.
It was not easy for them to watch the markets grow continuously when they had sold their investments in anticipation of a fall.
Cheering the Government’s move to unlock the economy, the stock markets rallying strongly, taking the Sensex up-to 39000. As an investor, here are five mistakes you should guard your portfolio against.
Don’t succumb to FOMO (Fear Of Missing Out)
You may have exited your equity investments and sat on the sidelines when things started heading down in March.
Now, with the stock markets have rallied 50% from the bottom, you could feel a strong urge to throw caution to the wind and push all your money back into equities all at once. However, this would be a mistake.
It’s highly unlikely that markets will continue its one-directional surge for very long. Once the euphoria settles, real data such as earnings growth and GDP numbers will come into focus and drive stock prices.
Going all in right now could mean that you’ll be staring at a heavy loss when the current rally retraces. Instead, it would be a lot wiser to stagger your way back in using weekly STP’s (Systematic Transfer Plans) over the next 3-4 months.
Beat the Action Bias!
If you were among those who saw their investments sink deep into the red when markets capitulated in March, you may be itching to take some sort of action with your portfolio, now that the notional loss is lower.
There’s absolutely no need to jump the gun and make rash decisions to exit your investments at this time. Remember, you got into equities for the long run – so remain invested through the ups and downs, and let the economic recovery play out properly over the next year or two.
Moving in and out of your investments will surely work to your detriment in the long run.
Don’t stop and start your SIP’s
Remember, we’re not out of the woods as yet. What we are seeing right now is nothing more than a euphoric, liquidity fuelled spurt in stock prices because the lockdown was lifted.
Though the worst may very well be behind us for now, stock-markets wise, a long and winding road towards economic rehabilitation lies ahead. As the world adjusts to the new normal, we’ll see plenty of volatility in the markets.
It’ll certainly be a few quarters before consumption returns to pre-COVID levels. In the interim, we may witness more measures to curtail the spread of the virus, which may hurt market sentiments.
Some businesses will flounder, while others will adapt and grow. In such a volatile scenario, the best thing you can do is to allow your SIP’s to continue dispassionately – a month in, month out.
Stopping and starting your SIP’s would be a big mistake. Just sit tight and let Rupee Cost Averaging work its magic.
Don’t time the market
With the number of variables and incoming data prints involved, it would be impossible to predict the short and medium-term direction of the markets during this time.
You may have one bullish month followed by a severely bearish month, followed by another surge. Towards the end of May, banking stocks rallied 10% in two days for no apparent reason! In times of such extreme volatility, any attempt at trading would most likely land you in a big soup.
Whatever you do, do not try to time the market; instead, follow a disciplined approach to investing, staggering investments into the markets using a well-planned approach wherever necessary.
Don’t invest unadvised
In choppy waters, the support of an astute Advisor can prove invaluable. In such times, even the most seasoned investors can fall prey to a host of behavioral biases that will work to their long-term detriment.
Your Financial Advisor can be the much-needed voice of reason that will help you make better investment decisions. Choosing to invest unadvised to pinch a few pennies would be a highly regrettable decision right now.
Don’t fly solo – instead, hand over the controls to a conflict-free, competent Financial Advisor who is acting in your long-term interest!
As the nation grapples with the devastating impact of COVID 19 and financial markets gyrate to the tune of incoming news flows, a number of valuable financial lessons come to the fore. Here are five important ones.
Adequate Health Insurance is a must
Many of us rely on our company-provided Mediclaim policies to fund our healthcare emergencies. What we fail to account for, though, is the fact that an unexpected job loss could leave our families without health insurance protection almost overnight.
Also, worth considering is the fact that COVID 19 treatment costs have run into several lakhs for many affected patients.
The crisis has certainly taught us the importance of having an optimal quantum of high-quality health insurance coverage in place, notwithstanding your company provided Mediclaim.
Timing the market is futile
When the NIFTY sank to sub-8000 levels in March and sentiment was at its lowest point, doomsday predictions were a dime a dozen. Investors made a collective beeline for the redemption button and exited equities.
However, markets have since staged a smart recovery, and are showing definitive signs of strength. The takeaway here is the well-worn fact that market timing is impossible, and so should therefore not be attempted.
The only way to create long term wealth from financial markets is to follow a contrarian approach by accumulating equities when fear is at its highest point and to sit through the rough rides thereafter.
An Emergency Fund is vital
If there’s one Financial lesson that the COVID-19 crisis has taught us, it’s the critical importance of building a savings pool that can be used to ride out a prolonged contingency.
An emergency fund is the most basic pillar of sound financial health. Make sure you’re putting away money consistently into a financial instrument that is low risk in nature and gives you the comfort of easy and immediate access to capital.
Follow the thumb rule of having 6 to 12 months of fixed monthly expenses stashed away at all times – you never know when you might need it, as emergencies don’t come announced.
Discipline makes a world of difference
The most effective antidote to the host of behavioral fallacies that plague our day to day investment decisions is to follow a disciplined approach.
In fact, this argument carries even more weight during volatile times such as these. Investing via SIP’s (Systematic Investment Plans) without giving a second thought to market levels or the unending stream of good and bad news flows that inundate our minds on a daily basis, can prove extremely effective.
In the long run, such automatic averaging would go a long way in ensuring fantastic portfolio returns. Stay disciplined.
Unadvised Investing can be injurious to your portfolio!
Needless to say, unadvised investors who went down the direct plan route in a hapless bid to save on investment costs have had a harrowing time of late.
Without the valuable support of a “coach” in the form of a qualified Financial Advisor, many of them have taken regrettable investment decisions in the past couple of months that will have long-term ramifications on their future wealth creation.
For best results, seek the support of an experienced and proven Financial Advisor who will be acting in your interest at all times. COVID or no COVID, flying solo can prove dangerous to your Financial Health!
