During times of volatility in the stock markets we usually tend to come across a lot of conflicting opinions. Risk has always been a vital aspect of investments and thus it is simpler to talk about risk when the stock markets are performing well. However, when the prices of shares held by normal investors drop with each passing day, then it becomes really difficult to take decisions.
Discussed below are some pointers that need to be pondered about.
- The first thing that any investor needs to do is to avoid the enticement of timing the ups and downs in the market. A lot of us who invest tend to think that we cannot make money or create wealth if we are not able to get the correct market timing. Investors usually allocated excessive levels of money into a particular product to book profits. Now the question that arises is; what the investor does with that booked profit. In case it is reinvested, then all that is being done is adjustment of the amount invested and that in reality is nothing more than revision of amount of money invested. Comparatively, keeping money saved in a bank is rebalancing. Hence, it is important to strategically take into account all the available choices, instead of making tactical choices. The financial and investment decisions should be in line with one’s goals and not with the behavior of the markets.
- The second thing to keep in mind is to always deliberate at length before taking a decision. Avoid getting swayed by boisterous buying or panic sales at trading counters. Traders earn their money by taking short-term stances, payment of margins, and incurring interest charges on open stances/positions. When there is drop in the prices, cash for margin is hard to find when getting beaten in an open position. This is the reason they quickly sell and are enveloped in panic during a market crash. Do not think of yourself to be in a position which is not going to be a reality for you. Your money is not burrowed, but your hard earned money.
- The third thing to remember is to never try catching a sharp object. It means avoid risks. There are hi-tech systems available to professional market investors who use them to track their profits and positions. They have to carry out complex schemes to assist them in competing in a tough, hard market. Normal investors should avoid the risk related to bear markets and continue to save for their goals in life.
- Do not forget the fact that a falling tide will take everything along with in its wake. Recently the unprofessionalism at IL&FS resulted in drop in the value of non-banking shares due to increased fear that there may be defaults and downgrades across the sector. It can thus be deduced that the stock values are getting reworked by the markets as per new information that becomes available. This does not offer an immediate chance to buy, though the temptation to purchase good shares at low prices will always be there. It is not possible to correct a bad balance sheet over a short period of time. Therefore, avoid selling or buying stocks in haste.
- It is important to always be on the lookout for clues. After the hullabaloo has settled down and a real strategy to correct the defaulting of big companies is conceived, is the time when the actual process of recovery starts. Hence, there is no need for normal investors looking for long-term gains to make decisions preemptively.
- Carry out a thorough and careful evaluation of all the information at hand. If there is continuous steep fall in the value of your stocks and price correction/recovery does not occur even with discovery of new, good news, then losses may have to be booked by you. Quality is the aspect of stocks that one needs to place the most value on in a risk-laden market. Avoid holding onto junk shares, understand your errors, and take action to make it right.
- People who have a sudden influx of a large sum of money, via retirement funds or sale of real estate, etc., should hold onto that cash. During times of volatility and risk in the market, it is best to hold funds in the form of cash. Once there is more clarity in the market, we can begin the process of investment. Never get pushed into making an investment decision by anyone. During times of risky market, the best investment plan is to do very little, or even nothing at all.
- Systematic investors who are putting big/small amounts of cash as monthly investments in mutual funds should know that their financial strategy is sound enough. The value of the mutual funds portfolio will drop in tune with bear markets, but that should not be a cause of concern if the financial and investment goals are for the long-term. It is recommended that investors should not discontinue putting money via Systematic Investment Plan (SIP) into mutual funds even during times of market turmoil.
- Investors whose financial goals are for the near future, but are stuck with investment in equity for booking some quick profits, just need to realize that accept that they are in bad luck. Such situations are common with investments that offer better than average returns but also carry an inherent risk. It can thus be said that boring and simple is not a bad strategy of investment.