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What Should I Do When the Markets Fall?

It's natural to feel uneasy when you see your hard earned money that you invested trickle down in value. The next emotional step would be to cap those losses and try to save whatever's left. This is where most of us make an error. In the short term, the markets go up, and they go down. But in the long run, the markets yield positive returns.

So here's what one can do in falling markets to build resilience:

1. Sit Tight 🧘🏻‍♂️

When it comes to investing, it’s necessary to keep emotions aside and focus on rationality instead. Volatility is a fundamental component of the market. Markets are meant to move, and that needs to be accepted. You may feel that you could lose it all, and also get a lot of WhatsApp forwards suggesting the same, but sit tight.

When the pandemic initially started, the markets spiralled down. In less than a month, the markets had fallen more than 30%. That’s a third of your investments vanished in less than a month - no matter how long you took to earn that money. Assuming you had invested Rs. 10 lakh, in less than a month, you would have been left with Rs. 7 lakh. It is undoubtedly tempting to cap your losses and save what’s left.

But what happened in the next 2 years is exactly in line with what we’re saying. If you just sat there, and let the markets do their job, your Rs. 7 lakh would have become Rs. 14 lakh within the next 2 years.

2. Buy the dips 🙃

One phrase that’s most commonly said, but the least commonly used is - Buy Low and Sell High. Instead, emotions take over and people end up doing the opposite. The right way of looking at large falls in the markets is - stuff is now available at a discount, and you need to keep buying it each time the discount increases!

Going back to the previous example. When your Rs. 10 lakh became Rs. 7 lakh, if you doubled up on your investment, and made that Rs. 14 lakh, that Rs. 14 lakh would be worth Rs. 28 lakh in less than 2 years.

It is rather tough to double up on investments when the markets are falling, but that’s only emotionally difficult. Rationally, it is the most intuitive decision!

3. Invest passively 🏃🏻‍♂️

Investing in a diversified portfolio of low-cost index funds can be the easiest way to beat falling markets. Diversification has the advantage of placing your eggs in multiple baskets so you can absorb shocks better. If equity markets fall, you have exposure to safer asset classes like debt and gold to add stability to your portfolio.

Take the last month for example, the equity markets fell sharply. Had you invested in debt, gold or commodities, your portfolio would have lost lesser (or even gained, depending on the exposure taken), relative to an only-equity portfolio.

Also, by investing passively, you are choosing to follow the movement of the broader market, rather than just a few stocks. As long as the markets grow over time, you will end up growing your wealth.

4. Continue those SIPs 🥤

Investing a fixed amount on a schedule every month keeps you disciplined, and committed to investing regularly. The advantage of investing a fixed amount every month is that you will end up being more shares when the markets are falling (lower price), and less shares when the markets are rising (higher price). That way, you end up with a better costing on your portfolio by investing regularly through ups and downs, instead of investing just through a steady rise in the markets.

One way to reap more from this strategy is to increase your investment value when the markets are falling. That way you end up with more shares being acquired at a lower cost, further lowering your average cost, and benefiting even more when the markets are rising.

5. Optimise the portfolio 🚀

As asset classes rise and fall in value, your portfolio may start to drift away from its ideal asset allocation. Rebalancing your portfolio is the method of readjusting your portfolio, which will require selling holdings in some asset classes and buying more of other asset classes.

So basically if you say you want only 20% of your portfolio to be of a particular asset class, changes in the stock prices may change that weightage. So you have to keep rebalancing, in order for the portfolio to stay balanced. Historically its been proven to give better results.

Not doing this can impact the portfolio negatively. Take the pandemic fall for example. When stocks reduced by a third in value, their composition in your portfolio would have come off. If you tune this back up to its original allocation in the portfolio, the next up-move will be beneficial. Otherwise, unadjusted, your gains would have been limited to the lower exposure of equities post the fall.

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