What to do when the market falls?
“Paisa doob gaya!!”
It’s safe to assume this to be our common reaction to a falling market right?
You’ve surely gone through one or more of these feelings when the market has fallen: panic, fear, anxiety, anger, sadness, or desperation.
What if we tell you that the falling of the market can potentially make no difference to you?
What if we tell you that despite the falling market, you can still make profits?
No, you don’t need to be pinched, because you aren’t dreaming.
Here are the reasons why you may not need to panic when the market falls:
#1 ‘What comes down, must go up’
Historically, for every time that the market has fallen, it has (obviously) gotten back up too.
The market falling is usually because of an incident or news, or when the market corrects itself.
While there is no denying that this can have an effect on traders, for the long-term investors, it is not a sign of concern at all.
Here’s what we mean.
Had you invested your money in 2009, it would have had its ups and downs multiple times over the next 10 odd years.
But being a part of this community, we know wealth is a long-term game.
Over the next 10 years, your investment would only increase, because, over the long run, the stock market has always gone up.
Just a word of caution here – review your portfolio and if the fall in the price of a stock you own is because of change in fundamentals of the stock (rather than an overall panic or correction in the market) it may be time to exit such stocks.
#2 ‘Wrong place at the wrong time’
Do you know how in life, some things just happen in the wrong place at the wrong time?
That’s what happens when panic sets in during a falling market.
After the market falls, panic makes you sell the stock you own in the attempt to save yourself from losing more, and you decide to sit out of the market until that vicious bear has left the market.
That’s where things go wrong. What ends up happening is that we sell stocks at a price lower than we bought them when the market crashes and then we miss the upturns and try buying it again when the prices have increased. The opposite of what we should be doing. We end up being in the wrong place and at the wrong time. How to be at the right place and at the right time?
Just wait it out. Nobody likes when markets fall, but considering it being inevitable, just wait it out. Don’t panic sell. We will again caution you to check the fundamentals of the stock. If the fall in the price of a stock you own is due to a change in the fundamentals of a stock, it may well be time to sell. However, if the stock is down just because of an overall fall in the market, hold on, because the market will rise again.
#3 ‘Buy the way’
Roughly, what would an ideal deal look like? Buying a stock at a low price and selling it at a higher price, right?
Surprisingly, what panic can do is make you forget this basic formula to earning money.
Raj used to sell mugs for a living. He had an inventory of 1000 mugs. One day, an unfortunate event occurs that results in a dramatic drop in demand for mugs (let’s not get into what causes a drop in demand for mugs). Now, Raj takes some time to understand the situation. He thinks of selling them quickly so that he can make some money from the mugs that he has. But after thinking rationally about it, he decides to buy more mugs.
What? Why would he buy more? The prices have fallen!
Raj realizes that the market has fallen, but it won’t stay down. He buys another 500 mugs.
Do you know what happens next? Slowly but surely, the market rises again. Raj now has an additional inventory of 500 mugs that he bought at a much lesser price but now he gets to sell them at a higher price as the market rises again.
Imagine if he had not just missed buying the 500 new mugs at a lower price, but also sold 1000 that he had at a lower price.
Be wise in selecting, and if the fundamentals are the same, buy more mugs!
Quick tip: You can also buy a few stocks incrementally to be safer. Buying a few and seeing how the market is doing and buying more accordingly is a safe and solid strategy to adopt.
Lastly, take a look at your portfolio again and reassess what you own. The idea is to check if the stocks you own still hold water today. More often your stock picks can withstand the falling of a market. However, at certain times, specific industries take a hit. Check your portfolio for stocks from that industry and if it is significantly affected, it may be time for you to sell those stocks.
We don’t want an underperforming stock to hamper your overall portfolio returns!
Kyu ki har ek stock zaruri hota hai!
These are 4 tips for you to follow to make it through a falling market. Make sure to stay tuned for more such articles! Cheers!
Disclaimer : ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. The contents herein mentioned are solely for informational and educational purpose. Investments in securities market are subject to market risks, read all the related documents carefully before investing.