Equity markets are down 7% from recent highs: Should you invest more now?

Our markets are hitting air pockets these days. Since making new all-time highs in October this year, the indices have fallen close to 6 percent now.

What should we investors be doing right now? Should we invest now? Or should we wait for further correction?

10-15 percent falls are common

A 10 percent market fall is quite normal. You may not like it when your portfolio is down, but that is what it is. In fact, these 10-15 percent cuts, whenever they happen, are actually very healthy. They clear out a lot of froth and if you are investing for the long term, then it’s like getting stuff at a 10-15 percent discount temporarily. You can benefit from it

This fall has many people excited. But most of these people are asking the obvious question.

Should you wait for a deeper fall?

Honestly, I don’t know if markets will fall more. It might and go on to -20 percent or -30 percent or like March 2020, fall by -40 percent in a matter of less than a month! But it’s also possible that it might not fall any further.

There are many predicting volatile times ahead. But no one knows for sure. And just waiting for one large correction to invest it all is a sure-shot recipe for remaining out of markets (and missing the up-moves / profits) for years.

Imagine sitting on tons of cash waiting to invest when markets fall by 30 percent, only to see that markets come down by 25 percent and then move back up! Everyone wants to invest enough to take advantage of small falls while still keeping enough to wait for big falls. Easier said than done! And often, the result is that people miss out on investing in these not-so-large falls. So what exactly should you do?

What must you do?

If you are getting all excited and have this urge to do something as ‘markets have fallen by 10 percent now’, then here are a few recommendations:

-If you do not have surplus money to invest, you might be tempted to dip into your emergency fund. And it might seem like a smart thing to do for many. But please don’t do it. It’s not worth it. No matter what happens and what others are doing, please don’t touch your emergency fund to invest in market falls.

-If you are saving for short to medium-term goals (1-5 years), then continue having nil-to-low equity in the goal portfolio. Even after this 10 percent fall, I don’t recommend investing any more in equity for short-term goals, though some equity is still acceptable for medium-term goals.

-For long-term goals (5-7+ years), a 10 percent fall is not a big one, but is still a welcome development. So if you have a surplus (in addition to what you are already investing regularly via SIPs for various goals), then you could consider using at least a part* of the surplus to invest now in equity funds.

*How big a part? It depends on each individual, their risk appetite, goal characteristics and the advisor’s view.

-But what if you don’t have a surplus, but have money parked in debt funds as part of your asset allocation for long-term goals? In that case, the 10 percent fall has just presented an opportunity. Use a part of it to invest into equity immediately and consider gradual deployment via STP for the rest. That way, if markets don’t fall more, you would have invested something. But if they do fall more, you will continue to invest more via STP (or partial lump-sum manually), thereby benefiting from lower average purchase costs.

The above may not seem like a solid and 100 percent accurate action plan. But we cannot predict whether we will see a deeper correction or not. We cannot eliminate the risk of being wrong. So we just try to optimize our investment decisions to the best of our abilities.

But if occasionally the market presents us with good opportunities, then assuming our resources permit, we should gradually take advantage of such opportunities without deviating too much from our original plan. And what if the market falls more, let’s say by 20 percent or even 30 percent?

Then invest more if you have the surplus. If you have money in debt instruments, then go ahead and rebalance so that money moves into equity to take advantage of the fall.