Should you Buy on dips this time in the Stock Market during COVID?
With a massive rise in Covid cases, sharp downside trends are likely to emerge. A volatile stock market could mean different opportunities to different investors. Some investors may buy at bargain prices, while some others may want to pull out their investments in panic. It’s a good strategy to buy low during a dip, but there’s more you need to know.
Different from the First Wave
Last year, paranoia and anxiety were high as there was no recourse or solution in sight to the pandemic. This year, the situation is far different. India has embarked on a massive, ambitious vaccination drive, and hence investor worry is low. Overall sentiments in the second wave are more balanced this time around, not likely to impact earnings severely. In all, there could be a correction in the market, which could be a good buying opportunity for investors with a long-term perspective.
Time in the Market is of the Essence
Despite analyst forecasts and expectation, there is no sure-fire way to predict how the market may move in the short run. But if you consider historical data, it can provide you with helpful context to establish a range of likely outcomes. This is known as mean reversion. As per mean reversion theory, asset prices eventually will revert to the long-run mean.
Keeping a long-term perspective in mind, let's look at four essential factors you need to ensure when investing in the stock market.
Long-term investing pays
If you look back in history, it shows that investors who have stayed invested for several years have benefited the most. Long-term investing has benefited many investors in building wealth and meeting their goals. Therefore, regardless of whether you invest when the market is high or low, avoid paying attention to short-term returns.
Delaying on investing could be expensive
Trying to time the market can cost an investor dearly. But at the same time, if you are afraid of investing because the market is either up or down, consider the value of missing out on good days. You may not want to look at current market conditions to decide whether it's a good time to invest.
Rupee cost averaging to the rescue
When you invest during a slump or a bull run, rupee cost averaging can be an effective way of reducing your investment risk. Also, it can counter the fear of investing at the wrong time. Contrary to the concept of trying to time the market, rupee cost averaging works on the premise that you invest at fixed intervals irrespective of whether the demand is high or low.
It's all about diversification
At the cornerstone of every risk-adjusted investment strategy, diversification is the key to building and safeguarding your assets. Risk-reward framework, current valuation and asset classes behave differently in different market conditions and over time. Hence, investing across asset classes can reduce volatility and asset correlation in your investment portfolio. Besides, it can also help you cut down the risk of investing a large amount in the market at one go, as asset classes generally perform differently over a period.
Despite the rise in infected cases, India may see a recovery in selected sectors. It is essential to keep those selected sectoral picks in your portfolio to gain in the future. Talk to your financial advisor to see if your portfolio requires structural themes that may do well in the next few years.
It's essential to focus on what you can control. Unfortunately, since no one can steer or control the stock market, what you can do is control how you invest, especially during downturns. The key to creating and preserving your wealth over the long run is to stay invested and stick with your financial plan. Remember to keep your investment plan in sight and adhere to it when investing. Trying to time the market by hoping for a downturn could leave your financial future at risk.
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