What to do when the market is falling?
Finance
Up until last week, it seemed like markets were hitting new highs every week. However, the market saw red this week as both Sensex and Nifty ended on a negative note.
While profit-booking by institutional investors and underwhelming quarterly results can be the reasons for the fall, many wonder if there will be similar intense sell-offs in the near future, and if this is the beginning of a bear market, or if the market is finally correcting!
Don’t panic
There is no telling with certainty what will happen next when the markets will enter the bearish cycle. What we do know, is that there will be a fall. Bears follow the bulls and vice versa!
While there are a lot of approaches one can take during a correction or a bear market, one thing that one should definitely not do: Panic!
Don’t stop your SIPs
Most people stop investing via SIPs when the markets are falling, don’t do that! Unless the reason why you selected the mutual fund scheme for investing no longer holds valid, you should continue investing and take advantage of rupee cost averaging i.e. get more units of the fund at lower NAV with the same SIP amount.
If the mutual fund holds stocks of quality companies, the NAV will eventually rise once the market improves!
Re-evaluate your investments
Remember, you incur losses when you sell something at a rate lower than you bought it at, but you don’t have to sell your investments just because they are falling at the current moment.
This doesn’t mean that you should mindlessly continue holding your investments. Balancing your portfolio is the key. Liquidate your risky positions, and stay in cash till you find worthwhile investments.
Buy more
If a stock falls because of a market crash today, it does not necessarily mean that the stock’s true value has gone down. You don’t have to sell it even if it goes below your buying price.
If you have done your research and see the true value in the company, buy more! Why? If you think something is worth Rs 100 and if it is available at Rs 80 right now, wouldn’t you buy more of it?
Lower your cost of purchase and see higher returns in the long run.
Timing the market is not necessary
Very few can time the market accurately. However, timing the market is not necessary, especially if you invest for the long term, what’s important is your time in the market.
Because in the long term, the market will always rise!
Irrespective of whether you started investing at each years, highs, lows, or close, your returns will be in a similar range.
The time period here (3 years, 5 years, 10 years, 15 years, 20 years) refers to the number of years ago you invested from today
Investing at the peak of a bull run
The largest fall the Indian equity markets have seen so far is in January 2008, when Sensex closed 1408 points lower than its open.
Even if you had invested in Sensex at the top of 2008 at 21,206 and let it stay invested, 13 years later in January 2021, your investment would be, 50,184.01, growing at a CAGR of 6.95% (excluding dividends).
This means even if you picked the worst time to put your money in the markets, it would still have grown at a decent rate!
Diversify
Lastly, equities are not the only investment option that you have. You can invest in fixed income, commodities, real estate, etc
You should always have a diversified portfolio, especially when the markets are volatile.
Diversification helps by covering your losses from one asset from the gains in another asset. Investing in instruments other than equities will ensure that when the equity markets are falling, there is some portion of your portfolio that is still doing well.
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