A falling stock market, like the one being witnessed, challenges the patience and resolve of even the most seasoned investors. Needless to say, a situation like this becomes even more challenging for new as well as not-so-experienced investors. The question that comes to the mind of most investors is whether this is the beginning of a bear market? Or, is it one of those phases that will last for a few months, without impacting the long-term prospects of the stock market?
As has been seen, time and again in a situation like this, the first instinct of non-serious as well as short-term investors is to abandon the stock market. The steep falls in the value of holdings afflicts their mindsets, as they do not have a clear time horizon for being in the market.
For a serious long-term investor, however, the situation is different. It is not that he remains unaffected. It is just that he has mentally prepared himself to brave these downturns, and, in addition, has time on his side.
It's been historically proven that a quality portfolio always recovers ground lost. It is important, therefore, to put market meltdowns in a proper perspective. Equity investors need to understand that even though most company stock prices are impacted in such a scenario, this doesn't necessarily mean the companies themselves are faring poorly. More, short-term movements in the market do not take away the ability of equity to outperform other asset classes in the long run.
Those who continue investing regularly during these turbulent times benefit the most when the market rebounds. While a haphazard approach may work when the market is on the way up, lasting success springs only from a strategic and deliberate approach. Remember, spur-of-the-moment decisions, based on current market trends, can prove to be very costly. For example, moving money out of equity funds now can make an investor miss out on gains later, when the market rebounds.
Now, a word of caution to investors, who may get tempted to make a quick buck in the current market situation. They need to remember that even in times like these, it is vital to follow the same investment principles that one would in a normal market condition i.e. focus on suitability of the scheme, invest for the long term and go for a quality portfolio. Many investors get tempted by funds that witness maximum fall, thinking these would gain most once the market rebounds. This could prove suicidal, as those funds could be of poor quality, or the ones that are aggressive, such as mid- and small-cap funds, thematic as well as sector funds. Many of these would probably be the last to get back to their original NAVs.
Another dilemma equity investors face is whether it makes sense to switch to more conservative investments in a down market. The fall in equity portfolio value, along with the negative news flow, adds to the anxiety. While moving money from equity funds to more conservative options like fixed maturity plans and fixed deposits may seem a sensible thing to do, the fact remains that selling in a down market can prove a costly mistake. A haphazard or an extremely cautious approach can expose an investor to the risk of falling short of a long-term financial goal.
The key, therefore, is to keep focus on the long-term investment goals and to continue investing in an asset class like equity, irrespective of the market condition.
The writer is CEO, Wiseinvest Advisors. The views expressed are his own
