How should investors respond to a falling market now?

Until a few months back when the markets were relentlessly scaling new peaks, no one had the slightest clue when the party will get over. The tide has turned now, although not sure, if it has turned for good. There are multiple factors attributed to this downward spiral which include the uncertainty due to the middle-east war and US elections coupled with weak earnings season and profit booking. The benchmark Nifty 50 has fallen 8.5 per cent from its 52-week high. Investors who were used to seeing green in their portfolios day in and day out are now grappling with the new reality. The negative news on social media, print media are likely to induce the investors to take some action – although it may not be in their best interests.

So, what should investors do now? How should they respond?

Firstly, such declines will test an investor’s patience and whether he has the courage to build long-term wealth. Being surrounded by all gloomy news is going to add to the mental fogginess as he gets pulled from all corners about markets views of self-proclaimed experts on TV channels and finfluencers. What an investor needs at such a juncture is clarity of thought regarding his/her own personal situation. Clarity about asset allocation and financial goals aligned with fund requirement should enable an investor to take solid decisions.

Here are 3 things to bear in mind in this falling market:

  • Timing the market won’t help. Do not wait for markets to go down further. Continue SIPs in mutual funds and take advantage of the downturn to accumulate more units. If you have additional surplus to spare which can go in the long-term equity bucket, invest such lumpsum amount during major declines. Keep a tab on your asset allocation before making investment decisions.
  • Do not panic and convert your notional losses into actual losses. While old investors who have witnessed major declines earlier have the experience now to tide through such volatile times, it is the post-covid entrants who need to especially bear this in mind and avoid knee-jerk market reactions.
  • A market downturn could serve up cheap stocks but not every opportunity is worth investing. Investors who have invested in direct stocks solely on tips should not be tempted to average them out. Weak companies are often vulnerable and fall more during market declines, wiping off the froth which had accumulated during the sustained rally. Comparatively, fundamentally good companies will be more resilient and eventually stand out as good investment opportunities.  Try to understand the business dynamics of a company and if it looks fundamentally good, accumulate its shares.

Hope these points will provide clarity and direction. The time now is to focus on long term wealth creation and not market noise. This especially holds true for an investor who has been inadequately invested in equities or someone who has been a late entrant and largely missed the previous rallies.

The quote below aptly resonates with my thoughts which I have tried to articulate in this blog.

“Rich people make money when the stock market goes up, rich people make even more money when the stock market goes down” – Anonymous.

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