In the words of one of the greatest investors ever to live on this planet- Warren Buffett, the most important quality for an investor is temperament, not intellect. Many of you might have heard this quote, right? But how many of you are actually able to abide by it? Especially when it comes to adverse circumstances like stock market crashes. Seldom do investors act with patience and prudence. So, have you ever wondered why most of you get panic-stricken on hearing the words 'market crash'? It's a matter of a few seconds and an incorrect decision, that one ends up sitting on a pile of losses. Isn't it? While it's completely fine to worry about your hard-earned money invested in equities, it's not okay to blindly believe the hearsays or biased opinions, no matter how many people are behind it.
In fact, instead of facing losses, you can instead turn the market crashes into an opportunity to actually utilise it to your benefit! Its just a matter of taking the right steps.?Eager to know how? Let's help you dig deeper and explain how to handle your investments during market crashes and minimise?any possible negative impact on your portfolio.??
In both extremes of the market, whether a crash or surge, resisting the obvious holds the key. After all, when you follow the crowd blindly, you also fall into the same hole as them! Despite the tons of negative news you heard during market crashes, the key is patience and turning a blind eye towards the misconceptions. Giving in to the urge to sell would in all likelihood lead you to booking losses and thus, losing your hard earned and investment money just because of panic. So, no matter what your friends, family or colleagues are saying, only those who stop believing the hearsay or biased opinions turn out to be winners by reaping the rewards when the markets recover later. While it's completely understandable to feel fearful upon seeing your portfolio in red, but that's exactly where you need to control the urge to sell, and let go of the fear of a further fall. History has been a witness that the market has always recovered from a crash, the most recent example being the stock market crash of march 2020, wherein NIFTY 50 had crashed to almost the 7,500 mark. With the market currently soaring high, like NIFTY 50 soaring above 18,000 mark, this in itself proves the point.
Just like the obvious urge of panic selling, market crashes also tend to prompt existing investors to pause their SIPs. Expected as a knee-jerk reaction to steep market downfalls, many investors stop or even start redeeming the existing investments. That's again, where we all go wrong. Instead of getting overwhelmed by the emotion of fear, just go ahead to continue your SIPs during the market downtrend just like you do when the market goes up. Continuing SIPs during the bearish phase allow you to buy more units at lower NAVs, which translates into lower average investment cost. And when the market rebounds, its these continued investments that will help in creating a bigger corpus and even reach the set financial goals sooner than expected as per investment horizon.
As mentioned earlier in the article, you can turn market crashes into an opportunity to reap the rewards and earn higher returns, by going for asset allocation. For those who don't know, asset allocation strategy is the process of distributing investments across various asset classes on the basis of your risk-appetite and investment horizon. Now, as the equity market witnesses steep downfall during crashes, the proportion of equity investments in your portfolio will drop down due to a dip in valuations, hence the portfolios bleed red too. So, not only should you anyway make equity investments during market crashes (if your risk appetite allows) in order to gain the benefit of attractive valuations in the form of lower NAVs, you can even re-balance your portfolio by selling your fixed income instruments, if any, and use those funds to top up your existing equity investments. The latter would therefore, assist in bringing back your portfolio to the original asset mix.
For instance, assume that you have set a debt-equity allocation of 40:60 for your overall investment portfolio. However, a steep downfall in equity returns due to market crash results in your debt component outstripping your original debt-equity ratio. So, to bring this ratio back to 40:60, you can purchase?more equity exposure at relatively attractive valuations during market crashes, in order to increase your equity exposure.
Amidst your bid to catch the market at attractive valuations during market crashes, never ever get tempted to invest your entire surplus money into equity funds. This is because, in case any unforeseen financial exigency strikes during this period of bearish phase, letting go of your entire liquidity can force you to either redeem your equity fund investments at a loss or take high costs loans, both having adverse impact on your financial life. Hence, when investing in equity funds, especially to fetch attractive valuations like in case of market crashes, do so only and only after factoring your contributions towards emergency fund and other crucial life goals. This will allow you to deal with financial exigencies without harming your financial health and investments in any way.
Now that you have understood what steps to take in case of a market crash, the most important being to not indulge in panic selling and sit on losses, another question that pops up is, when to redeem your mutual fund investments? The answer to that lies in the trigger points that one should be aware of, apart from prevailing market conditions, of course, in order to timely exit their mutual fund investments and avoid falling prey to any knee-jerk reactions to sell them.
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