How do you react in a falling market?

How do you react in a falling market? 1

First Lesson – Don’t panic…….. please don’t panic. That’s the winning mantra to sail through such testing times. Remember the crash of 2008 and if one tries to correlate to the falling market of 2008 the severity and magnitude of market fall was very great. But scenarios have changes drastically this time around. The participation of the common investors has increased significantly and so does the market overall economic indicators and global market scenarios. The factors are many however I won’t deal them here in detail or else it will dilute the very point of discussion.

Few things one must realize – in a bullish market (as we have seen in the last 4 years) ultimately your cost price followed an upward trend you kept buying at high prices. Here comes the “Onion Theory” in fact that how I have coined it over the years. Let’s say the intrinsic price of onions in the market is 25 per kg and then comes a market scenario wherein you start buying them at the rate of 40 per kg or even 60 rupees per kg because of demand and supply gap and other variable factors. What do you do when you buy onions at the rate of 60 you are basically paying more per kg Right!!! In fact this is what really happens in a rising market. People are really happy over excited in such a rising market and they get overconfident. But don’t forget markets by their very nature are cyclical in nature and it fluctuates!!

So what if the investors saw a more than 30 percent annualized returns or even 50 percent in the mid and small cap fund segment in the last 1 to 2 years. Don’t forget the onion theory the market are cyclical in nature and it will fall (why not buy cheap and sell later at high price) and so will your overall portfolio valuation. In fact those new entrants in the last 3 to 4 years (who got overconfident) may not have even witnessed a falling market and are now experiencing the same and seems to be a worried lot. When market collapses every fund will replicate it except for fixed income funds though. In fact the fall will be huge for mid and small cap. So now what do you do as an investor?

Point Number 1: – For those of you who have been a regular investor with the market and have chosen funds appropriately do nothing and feel happy that you will get to buy the funds at a cheaper value. Secondly, it also considers the fact that you don’t need the money for let’s say – for the next 5 to 7 years and you have a long term vision with your goals sorted out and aligned properly. Don’t look at the market valuations every day. Psychology and temperament plays a major role in ones investment . Stick to your game plan because that is the most important thing for you. If you exit at this time you will miss the opportunity. Dealing with such market adversity is important. Ability to withstand to such a market scenario will go a long way to your final success of achieving your goals.

Point Number 2: – New Entrant in the last 1 year in the market who accidentally entered the market to reap the market rewards would see their portfolio gains withering away in a very dramatic manner. What do you do then? Should I sell? Well it is high time you plan out your goals. Once a market starts falling freely all the windfall gains will be gone in a matter of days ! This very experience will scare you so much that you may never invest in to equities ever again. Make sure you have chosen the right mix of funds. For example if you invested 100 rupees at least 25 to 30 percent of it should be put into fixed income funds this way it will protect your capital to an extent. For those who have made money though riding high on the mid and small cap funds move towards a balanced fund so as to minimize your returns and catch hold of the falling losses. Remember even though you get a far more lower returns still this way you will be able to minimize the risk to an extent. After all it’s your money right and you would also want to protect it from a far greater fall. For those of you who are in to the market for let’s say 2 to 4 years try to move to multi cap funds.

So now Let’s sum it up : –

  1. Be in a diversified fund at all times. Don’t buy too many funds.
  2. Invest regularly (as you brush your teeth regularly). Investment is a healthy habit.
  3. Keep a long term approach and invest your money which is quite aligned with your goals. This way no matter what you will be able to sail through the testing times ….

Till then…. Happy investing