A sharp fall in the global stock markets, prompted by the Russia-Ukraine crisis, surging Brent crude oil prices, US Fed rate hike and rising inflation have driven many retail investors into a panic mode.
Having corrected as much as 13 percent since January 17, the S&P BSE Sensex and CNX NSE Nifty have recovered, but are still down by about six percent.
Many retail investors have been thinking of either stopping or redeeming their mutual fund investments and putting the money in bank deposits. But this is not the first time the markets are facing a crisis of such magnitude. There have been situations since 1991, when at least one event in a decade has led to a crash in the benchmark indices by more than 35 percent in India.
A villain called ‘timing the market’
Many new investors make the mistake of exiting their equity funds when markets are falling. They think it is better to get out of the markets and re-enter when the market starts to recover. But it is almost impossible to time the markets. Timing the market refers to the idea of buying a stock at the bottom and selling it at the top.
Performing this consistently is very difficult and potentially very dangerous. Investors who attempt this may succeed on certain occasions, but constant success is very hard.
A bear market can often prompt investors to try and time the markets. If your timing goes wrong, your losses will be heavy. Timing the market can negatively impact your returns.
When a market downturn occurs, it is important to be aware of the long term. This can help one to maintain some perspective, because if we see historically, stocks have consistently given positive returns.
Even when the stock markets were bearish, historically, stocks have recovered and reached new heights. In 2020, during the COVID-19 breakout, the CNX NSE Nifty 50 fell from the 12,430 levels in January to about 7,600 levels in March, but it recovered and reached a new high of 18,600 by October 2021. In about 18 months, the market recovered all the losses and made a new high.
A diversified fund can help
Since timing the market is difficult, a diversified portfolio and a long-term perspective can help reduce the fear that accompanies a volatile market. In the short term, your portfolio may be in the red and showing some serious losses, but don’t lose heart and stay invested for a longer period of time. This would ensure that you are in the market during the best-performing month.
A diversified portfolio helps you to reduce losses and manage risk. When the value of one stock or investment falls heavily, there may be another stock which may have fallen not-so-sharply or not fallen at all. As a result, the portfolio’s overall performance has a lesser chance of being volatile.
A new investor may not have much knowledge about how to diversify the portfolio, but fund managers who manage and operate mutual funds allocate investors’ money in different stocks and sectors. These experts keep a close watch on the markets and take care of all the challenges.
Hence, during bad times, rather than panicking and exiting the investment portfolio, one should either stay patient and stop looking at the market for some time or start to buy the dip and average out the prices by accumulating more units. Continue with your monthly systematic investment plans (SIPs) and accumulate mutual fund units during the so-called ‘sale period’ and wait for the green line to show up on your statement.
This, too, shall pass and it will lead to another beautiful upward journey.