Even seasoned investors have panicked following the recent beating in the stock market. For long-term investors, the downturn in stocks, especially mid-caps has led to a massive erosion of wealth and confidence.
Fears of a liquidity crisis after the IL&FS default, escalating trade war tensions between China and the US, and other macroeconomic factors have led to the benchmark Sensex and Nifty tanking around 10 percent in the past month.
Given the increased volatility in market movements, most investors, including long-term investors tend to make a few mistakes in their investment behaviours. Even though this correction was long anticipated after a buoyant 2017, there are ways investors can come out of it stronger.
Here is a list of dos and don’ts in a falling market for long-term investors:
Continue investing in Systematic Investment Plans (SIPs)
Mutual funds have also tanked in the past month. Panic selling by foreign investors has sucked liquidity especially from liquid and debt funds. However, from a long-term perspective, these dips are temporary. The market historically has bounced back from such corrections. It is best to avoid knee-jerk reactions and stop all investments.
One of the benefits of investing through SIPs is the principle of rupee-cost averaging. Buying more units at a lower price averages the cost per unit of the fund leading to greater gains when the market is in a bull phase. This is why long-term investors should continue to invest in SIPs especially in a falling market.
However, that being said, it doesn’t mean that you should not reevaluate their portfolio. If the mutual fund isn’t performing as well as its peers, you can switch to better performing funds. Mid-cap and small-cap mutual funds are seeing sharp corrections as reflected in the stocks these funds invest in.
If the fund is invested in quality stocks with good business potential, it makes sense to stay invested. If the risk and volatility in the market are more than your threshold, you can switch to a large-cap fund that is relatively more stable in its growth. There is no need to redeem the mutual fund till it shows growth.
In a falling market, it is better to stick to SIPs even if it may not be in the same funds you invested in.
Purchase quality stocks at attractive valuations
Most of the top 100 stocks on the Sensex are down 10 percent to 40 percent in the last one month. This presents an excellent opportunity to pick stocks that are fundamentally sound at attractive valuations. Several large-cap stocks and good quality mid-cap stocks have seen a correction.
However, investing in these fundamentally sound companies can pay off in the long run. Use the opportunity presented by a falling market to expand and diversify your portfolio in quality stocks.
One important point to consider is to invest in stocks after thoroughly studying them. A well-researched decision of buying a stock can pay off handsomely in the long run when the stock recovers.
Panic sell based on news
Most stocks have bled heavily in the past month in tune with the benchmark indices. News about many stocks reaching their 52-week lows has flooded the markets. As a long-term investor, this is not the time to sell off stocks in a panic.
If the stock is of a fundamentally sound company with good medium-term business prospects, then the stock will show a recovery in the next bull cycle.
If the company has strong earnings growth potential, then the stock will show an upside in the next earnings cycle itself. Resorting to panic selling will only lead to mounting losses unnecessarily. Long-term perspective iron out high and a low, which is why you should retain quality stocks for a 3-5 year horizon.
That being said, if a stock has no potential of recovering its value, it is best to sell and exit the stock. It is necessary to evaluate each stock and exit stocks which do not have a good earning potential or are facing repayment defaults.
Invest in stocks based on non-verified stock information
A falling market presents an opportunity for many people on the sidelines to enter the market. As such, several technical players speculate about the growth of a particular stock, especially stocks priced cheap. Investing in stocks without studying them thoroughly is a risky gamble, even in a falling market.
There are many people who look to capitalize on stocks that are trading at their 52-week lows, however, this is an extremely risky strategy because these stocks could be at their lows because of weak fundamentals. Make a decision to invest only once a stock shows good fundamentals and growth prospects for the medium to long-term.
To conclude, a falling market presents an excellent time for investors to invest in quality picks. By avoiding non-verified stock information and taking decisions after thorough research, a falling market can turn out to be profitable even for a long-term investor.Disclaimer: The author is Head, Personal Wealth Advisory, at Edelweiss. The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.