Mistakes are plentiful during a market downtrend. Avoid these common ones, and you will be able to keep your hard-earned cash intact, suggest experts.
The Indian market has witnessed a swift fall so far in March largely weighed down by fears of coronavirus which is now hitting economic activity across the globe.
Morgan Stanley has already warned of a global recession in 2020 while global rating agencies such as S&P Global and Fitch Ratings reduced their GDP forecast for India for FY21.
Last week, Fitch Ratings slashed its growth forecast for India from 5.6 percent to 5.1 percent for 2020-21, as Covid-19 hit Indian manufacturers after supply chain disruptions in China while Standard and Poor’s (S&P) slashed its 2020 growth projection for India from 5.7 percent to 5.2 percent.
Investors have lost around Rs 24 lakh crore so far in the month of March on the BSE. The average market capitalisation of the BSE-listed companies fell from Rs 152.54 lakh crore as on 30th April to Rs 116.09 lakh crore recorded on March 20.
Both Sensex, as well as Nifty50, are now trading below crucial support levels. The S&P BSE Sensex plunged below 30,000 while the Nifty50 broke below 9,000-8,800 in the week gone by.
Amid all the gloom and doom in the market investors should avoid making some basic mistakes which could derail their plan of creating wealth over a period of time. Most of the investor portfolios have gone in the red with drawdowns of more than 20 percent, and in an extreme case, it could be 40-50 percent as well.
But, experts feel that staying put is the only way, and following some basic rules of investing will help them beat the stress of notional value erosion which has happened in their portfolios.
Mistakes are plentiful during a market downtrend. Avoid these common ones, and you will be able to keep your hard-earned cash intact, suggest experts. Here are some of the ruled which one should make note of:
Expert: Vinod Nair, head of research at Geojit Financial Services
DON’T SELL QUALITY NAMES:
Spread your investment in time, stocks and sectors. Stick with good stocks having leadership in sector, products or niche segment. Don’t be lured by low prices like new low, 52-week low or a bounce in price during such consolidation period.
Capitulation is not an opportunity for all stocks. Stick with quality and check the fundamental, chart and qualitative analysis before investing.
INVEST IN RESILIENT BUSINESSES
If one peeps into the year 2008, markets sharply declined around 50-60% from highs and stock prices of businesses which created wealth like Asian Paints, Tata Consultancy Services, Infosys corrected about 20-25%.
Drawing a similar analogy, given the recent correction, one should plan to invest in resilient businesses that have corrected only around 5-7%. Names like Kotak Mahindra Bank, Asian Paints, Bajaj Finance, Pidilite Industries and HUL giving the benefit of diversification as well and hence should be considered as potential buys.
Expert: Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor
INVEST WITH LONG TERM HORIZON:
Investing should be for the long haul and one should not react based on one day or one-week performance. For instance, between May 2008 and February 2009, the S&P 500 lost nearly half of its value.
In the five years that followed the S&P 500 climbed more than 153 percent. The stock market is hit by a deluge of bad news from both India and globally. Apart from the virus threat, crude prices would set the tone for the market in the near term.
Panicking in such a situation can lead to more wealth erosion or might depreciate your capital.
FOCUS ON PROTECTING CAPITAL:
Investors should focus on protecting capital by avoiding some common mistakes that they usually make in a downtrend market. This would be the right time to invest in most of the stocks which are placed well fundamentally as they are oversold and are available at many attractive valuations.
INVEST IN A STAGGERED MANNER:
Investors should invest in a staggered manner to make the most of this volatility. When the market bottoms out, one should keep investing and not try to time the market. However, we would advise waiting for the market to settle before taking a buy position.
Expert: William O'Neil India
BUYING BEFORE A BASE COMPLETES
During the recent market correction, many stocks pulled down to their respective 200-DMA and only some found support. To some traders, long-term support was a buying opportunity.
The key to making money in the market is waiting until a base completes before buying. In most cases, stocks that come down to their 200-day lines do so amid signs of institutional selling.
Wait for the stock to prove itself more, and look for signs of institutional buying as the stock builds the right side of the base. Then you have a legitimate base.
BUYING EVERY POSSIBLE BREAKOUT:
Bullish stock charts tempt investors all the time during down markets. Some growth names will hang in there with compelling charts. A breakout may work for a while, but it will likely be short-lived. While stocks that hold up the best during down markets can go on to be the next leaders, they still should not be bought during a [downtrend}.
KEEP HOLDING A STOCK OR EVEN AVERAGING DOWN
The stock trades at Rs 100 a share. Your cost basis is Rs 100. The stock heads lower, and you buy an equal amount of shares at Rs 80, lowering your cost basis to Rs 90. Then you add further at Rs 75 after it breaches its 50-and 200-DMA.
The problem is that you’re averaging down in a former leader that’s under tremendous institutional selling pressure. You will be doing some serious damage to your portfolio. It rarely makes sense to buy a stock that has the potential to spiral lower before finally hitting a bottom.
BUYING LOW P/E STOCKS
The Price-to-earnings ratio is a common valuation tool. But buying/selling decision based on P/E is not a prudent move. Expensive stocks can become cheap, but cheap stocks become cheaper in a down market.
Trying to catch a stock “on-sale” is fraught with risk. In many cases, stocks with low P/E ratios are suffering from weak fundamentals, where shrinking market share results in lower earnings growth. That’s not something you want to see in a stock.
Remember, some of the best merchandise in the stock market often sells at a pricey valuation due to strong fundamentals and bullish growth prospects.
STOP PAYING ATTENTION
It is easy to lose interest when stocks are selling off, but market downtrends let high-quality names take a breather and eventually build new bases. When a new uptrend is confirmed, breakouts deliver the biggest gains. During a market pullback, try hard to make a list of stocks that held up the best.
A few will show limited signs of distribution (heavy-volume selling) on the way down and accumulation (high-volume buying) on the way up.
Focus on the most resilient names with the least amount of technical damage. They will generally be your best prospects.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Time to show-off your poker skills and win Rs.25 lakhs with no investment. Register Now!