What Should Investors Do When Markets Decline?
Human psychology plays a big role in investing. Decisions are taken not just through logic but also emotions.
Fear and greed drive investor decision. A lot of people start investing when markets go up. On the other hand, they stop when markets go down. This is completely opposite when we buy other things.
Recently, I have been getting a lot of questions like:
- “Where are markets headed?”
- “Is recession coming?”
- “When are markets going to crash?”
I wish I knew. It is almost impossible to predict markets. The best of the minds have failed in the past. So instead of wasting time in predicting markets, I follow a process. Here are a few pointers I follow and might benefit you as well.
Continue your SIP
SIP is one of the best methods to stay invested in the stock market – be it going down or going up.
Ramesh is an adventurous investor. He reads the financial news every day. He invests when he thinks is the right time. He has opinions on how markets will react to elections, wars and natural calamities.
Suresh has been investing for the last 15 years. He has his SIP running. He keeps increasing his SIP amount as his salary increases or his expenses go down. He also manages enough money in liquid funds to make sure he is prepared for emergencies.
Whom do you think will win? Suresh will be much happier and richer in my opinion.
Diversification is one simple concept but not well understood by a lot of investors. There are multiple Categories like – Equity Savings Fund, Balance Funds, Dynamic Asset Allocation Funds, Large Cap funds, Multi Cap Funds.
Diversification helps you in dealing with volatility with one specific asset class. Let me explain with an example.
Similarly, low exposure in sector funds helps you deal with high volatility in sector funds.
Always Look for a Long Term
I have been investing and advising clients for the last 18 years and I have learned two things about the News that we read.
Most of the news is just noise
Even experts who speak regularly on news channel have gone terribly wrong in the past.
Liquidity means access to capital when you need it. All the good investors I know always keep some liquidity. It might be 5% of your net worth or 20% of your net worth or whatever you are comfortable with. All your portfolio in liquid funds or savings account is actually your liquidity.
Let’s say if markets crash 20% in the next week – one can use liquid cash to deploy in the beaten down markets. Most of the investors lose out because they face a liquidity crunch in the falling markets.
Stay invested with your SIPs.
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