Up until now, we have covered the basics of the Indian stock market, including how to analyse companies, choose brokers, utilise mutual funds, and more for reputed equity investments.
However, with great reward potential in stocks also come higher short term risks.
So how do beginner investors balance during periods when broader indices fall over 20%, termed as market crashes? Let's explore the nuances and practical tips to sail through.
1. Diversification as a Shield
Diversification, the concept of spreading investments across various asset classes such as stocks, bonds, real estate, and commodities, can help mitigate risks associated with a downturn in any particular sector or market
Apart from this, within the equity portfolio, diversifying across industries and geographies can further cushion the impact of market volatility
2. Stay Aware of the Macro Landscape
Try to understand fundamentally what key economic triggers seem to be causing the turmoil - is high inflation destabilising or is the global energy crisis disrupting industries? Don't react just based on psychological newspaper headlines, which fuel panic
Analyse the underlying data and factors by simplifying them to get the right context.
3. Focus on Business Fundamentals
Keep a check on the quarterly results and annual reports of portfolio companies. Seek and understand whether temporary macro factors or long-lasting company-specific issues are bringing down the stock price
Fundamentally strong firms with robust balance sheets, low costs, and a great competitive advantage bounce back stronger after dips like these.
Every prudent investor sets aside some proportion of their portfolio (10-15%) in safe cash equivalents like liquid funds
Market corrections are when you liquidate part of this and wait to reinvest in high-conviction stocks at a cheaper valuation. Even simpler investing, like index investing, becomes more affordable to increase equity exposure
Doing so consistently through the dip compounds wealth multi-fold in the eventual rebound and the following long term.
5. SIPs & Staying Invested for Long Term
Don't attempt to time absolute peaks or rock bottoms perfectly. Steadily accumulate out-of-favour stocks showing temporary untenability but the long-term potential
Have 3-5 year visibility and stay invested instead of exiting prematurely or speculating in stocks.
In summary, while market corrections are learning opportunities to course-correct investing strategies, staying true to diligent principles focused on portfolio assets quality, valuations and India's structural growth journey aids retail investors navigate through effectively. Sooner than later, the weighing machine swings markets higher, rewarding patience and discipline.
While this is the best primer you'll ever need, expert advice never hurts anyone! Head over to our website and let us know what you need!
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