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Why you need to stay the Course when markets fall

Why People Resort to Market Timing

Here are some reasons why market timing is still around.

  • Investors are worried about losing their money.
  • Investors look to take advantage of everything they have during bull markets.
  • Investors find passive investing worrisome.
  • Investors like to do what "makes sense."

 

Blame Cognitive Biases

We experience several cognitive biases, one of them being loss aversion. It means we experience an extreme emotional feeling from losing than from winning. Simply put, while we love to win, it is the fear and hate of losing that is stronger. 

Another cognitive bias that can cloud our investment judgment is overconfidence. As rational investors, we know that market timing does not work. But the overconfidence factor that overtakes the sensible part of the brain would claim "market timing may not work for most others, but I know something that they don't." 

Blending loss aversion with overconfidence brings about the irrational concept of market timing.

 

Listen to Your Brain; Not Your Heart

When the stock market is setting record highs, the lure of market timing is high. Your heart may tell you that the next big crash is fast approaching. As tough as it may be, ignore that temporary feeling and continue the course of your current investment strategy.

Perhaps the next big market fall is around the corner. But it is also possible that it may not take place for the next 10 to 15 years. There is no way of knowing which of the possibilities may come through. 

Hence pulling out of the market would expose you to the risk of missing out on benefits. It’s time to take a page from elite investors who show the discipline to stick with their investment strategy when markets get volatile.

 

What You Need to Do

Investing in markets involves risk. If you're looking to avoid the risk by timing the market, you could simply be opening up to more significant and unwanted trouble. 

As an investor, you need to accept that there could be periods where investments go down. To understand your risk and how to invest accordingly, hire a financial advisor. They could be instrumental in managing your risk and avoiding the temptation of timing the market.

Timing the market is a huge emotional roller coaster. It requires 24 x 7 uptime and can be stressful to watch market movements minute by minute.

If you have a well-constructed portfolio with a long-term investment strategy, you would have no reason to panic when the market drops.

So, continue to stay invested and give your portfolio the time to ride out the volatility. If you aim to grow wealth, it means you need to invest objectively over time. Here's what you can do:

  • Strategize how to allocate your financial resources when planning for the future.
  • Build a robust action plan to meet short-term midterm and long-term goals that will see you through bull and bear markets.
  • Be rational about your investments, especially when planning for your retirement.
  • Weigh all your options on how you want to use your money.
  • Take advantage of time to ride the market and enjoy the benefits of rupee cost averaging.

 

Action Points

  • Maintain reasonable expectations without expecting miracles.
  • Stick to proper asset allocation and diversification

DISCLAIMER

ICICI Securities Ltd.( I-Sec). Registered office- ICICI Venture House, Appasaheb Marathe Marg, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code:-07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Investment in securities market are subject to market risks, read all the related documents carefully before investing. 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 non-broking products / services like Mutual Funds, Insurance, FD/ Bonds, loans, PMS, Tax, Elocker, NPS, IPO, Research, Financial Learning etc. are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.