Moneycontrol
Aug 12, 2017 10:52 AM IST | Source: Moneycontrol.com

Sensex down 1400 points from highs; top 10 mistakes to avoid in a falling market

Mr. Market gave what everybody wished for so long, a good decline. You like it or not, it has come. Well, if you wished for a decline or a dip then everyone should love it. Right!

Mr. Market gave what everybody wished for so long, a good decline. You like it or not, it has come. Well, if you wished for a decline or a dip then everyone should love it. Right!

But, the way it has fallen – the fast and the furious way seems to be troubling for analyst community. It broke key support levels in just few trading session which left many chartists in a state of disbelief.

Well, the reasons could be many for such a correction to happen – geopolitical concerns, SEBI on shell companies, too much liquidity, high valuations etc. but a dwindling market does more damage to investor sentiment rather than anything else.

Money lost can still be earned back but confidence once shaken takes some time. “A dwindling market challenges the patience and psychological tactic of investors at a higher point,” Dinesh Rohira, Founder & CEO, 5nance.com told Moneycontrol.

“Investor usually gets savvy towards such market condition which is directed by the psychological mind set rather than logical approach, which at later period causes a greater damage,” he said.

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We spoke to experts and hand picked ten mistakes which investors usually make in scenarios when market fall in a hurry:

Don't focus on a single sector, go for individual stocks:

When the stock market falls like nine pins it does not mean that there are no stocks with attractive valuations available in the market. The moment one start, stop, pause its investments, one is trying to time the market.

“Benchmark indices may fall but many of the individual stocks register good growth. One should go for a fundamentally strong company that has performed consistently well in the markets for a long term,” D K Aggarwal, Chairman, and MD, SMC Investments and Advisors Ltd told Moneycontrol.

“Look for companies where there is a visibility of earnings, stable management, visibility of earnings growth, strong pricing power or market presence, and can benefit from the expansion plan of the company,” he said.

Do not panic and do not stop your SIPs:

Don’t panic. Fall and rise are the parts and parcel of the market; it will correct itself every now and then and will get stabilized. “If one has stopped SIP should restart it as market won't just march ahead in one direction, however, it moves both up and down,” said Aggarwal. It is useless to panic and break the investment habit.

Don’t Take Decision on basis of Market Event:

The movement in the market is particularly triggered by developing events that drive either towards uptrend or downtrend direction depending upon the gravity of the events. “It is imperative for investors to understand the nature of such developing events which will assist to make a comprehensive decision. Such events are usually short-lived, which is irrespective of fundamentals and investor should refrain with such bulletin,” said Rohira.

Don't put all the eggs in one basket, but diversify:

Don’t pull all your eggs in one basket means don’t risk everything all at once and single asset class, but get diversified portfolio as diversification can help manage risk.

Aggarwal of Investments and Advisors Ltd recommends investors to always keep a balanced portfolio with a good mix of stocks, Mutual fund, bonds, Gold, and Cash. One need to make sure the portfolio designed is aligned to one's investment time frame, financial needs, and comfort with volatility.

Avoid Using Leverage:

Many investors use leverage to buy stocks either in cash or in the future market, but this may be dangerous. This could prove costly when investors get trapped on the wrong side of the trade.

Don’t Change Investment Strategy:

More often the decision of investors is basically driven by psychological emotion rather the logical scrutiny. Particularly during the falling market, this emotion prompts investor to take a wrong decision with a different strategy.

“Investors need to understand that even though prices are impacted in the current scenario, this doesn't necessarily mean the companies are progressing below par,” said Rohira.

“A quality portfolio with fundamental business outlook and strong past track record tends to recover from its bear phase much faster than the broader market, and thus it is important for an investor to further capitalize from such meltdowns without altering investment strategy,” he said.

Don’t Behold with Poor Portfolio:

If making a decision on investment is difficult, exiting from the current portfolio is an even bigger challenge for any investor, suggest experts. The fall in the value of holdings afflicts outlook, as investor continues to hold a portfolio with the hope of recovery.

However, if the portfolio doesn’t buy any rational outlook going forward, an investor shouldn’t hold onto poor portfolio, which may further erode investors’ wealth, suggest Rohira. “Such decision may be challenged by human emotion, therefore investor should never get caught in such psychological play,” he said.

Don’t Stop Organic Investment:

Investor at all-time should continue or initiate with an organic investment such as into mutual funds through to diversify its overall portfolio.

“As mutual funds are managed by professional fund manager, the risk associated with any market event is well factored through its asset allocation,” said Rohira.

Similarly, continuing investment with SIP evening during a falling market allows the investor to average its overall cost with more units in the portfolio. This process builds a defensive strategy in investor’s portfolio, he said.

Avoid Bad Advice:

At times during such falling regime, investors may get caught into bad advices even though with good intention which may rather cause a serious damage in the portfolio.

The ideal approach of investor should be sticking with fundamental strategy and conducting own research to examine outlook of business or economy as a whole which fits overall investment objective, explains Rohira of 5nance.com.

Don’t give up on equities:

The S&P BSE Sensex corrected by just a little over 4 percent which most experts were talking about. It is no doubt a healthy decline which should be mistaken as something that could reverse the trend. It takes care of excess froth in the system.

Investors should not change their investment strategy and lose faith in equities because it is still the best asset class which could give you maximum returns when compared with golds, fixed income, real estate etc.
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