As a new investor, it is easy to get swayed one way or another in the stock market. If the markets are in a bull run, euphoria can grip you, making you feel like the cycle will never end. Similarly, in a bear market phase, you may feel hopeless and fearful. Yet, these short term ups and downs happen time and time again in the stock market.
A simple glance at the index prices over the last few decades will show you that every decade or so, there is an event which causes a major correction of approximately 30% to 50%. Even within the same year, it is normal for markets to correct ~10% to 15% after a run up. Hence, it is important to understand these market cycles, prepare for them and not be taken by surprise when a downturn occurs.
Here are some important points to keep in mind to deal with both good and bad market phases:
- Have an Investment Charter in place: An investment charter is a highly effective tool to make prudent investment decisions so as to achieve your financial goals. You can do this by yourself, or preferably with the help of a financial advisor. A charter will help you set your goals, your asset allocation ranges, time horizon, etc. It will also ensure a disciplined and stoic approach to investing and the market’s ups and downs.
- Prepare for various scenarios beforehand: Along with asset allocation ratios, it is helpful to play out different scenarios beforehand. For example, these could be potential scenarios and decisions:
- Scenario - The stock market shoots up by more than 20%.
Decision - Readjust Asset Allocation by selling 10% Equity holdings and investing them in Debt Funds.
- Scenario - The stock market falls by 20% -
Decision - Have 5% liquid funds in place so as to take advantage and buy quality stocks and mutual funds during this fall. Also have a 5% Gold holding to cushion the hit to your portfolio.
- Scenario - Small cap funds rise by 20% but Large caps remain constant.
Decision - Take some profits and reinvest them into large cap mutual funds.
- Read about investment biases: In times of euphoria and uncertainty, the most primal instincts of our mind come forth. Hence, it is important to guard against rash decision making in these circumstances. Learn about hindsight bias, sunken cost fallacy, herd bias, etc., so as to not fall prey to them. Read about how accomplished investors such as Warren Buffet approach these scenarios. As he would say, “Be fearful when others are greedy, and greedy when others are fearful.”
There are various factors you can prepare for beforehand in the markets, and it can still take the best by surprise. Hence, it is important to keep the above points in mind and prepare for every possible scenario. A famous quote sums it up well - “Time in the market beats timing the market.” If you are just starting out on your investment journey and looking to buy shares online, you can now open your demat account online in a few easy steps. Learn more about the same here. If you wish to identify the best stocks on the market, learn about the techniques here.
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