One of my clients, 26yrs., working with an MNC and an ardent equity investor met me, harried this time, pretty obvious that he was considerably disturbed with the current downturn. He went on to tell me that, he had built a portfolio of about Rs. 4.5 lakh into equity, which was now standing at Rs 2 lakh.
The investments were done about 12 months back, and he complained that subsequently too, every stock he bought, slumped much lower the very next day. Now, he wanted to know, 'what should he do now?'
They say the simple rule in equities is, "Buy low, Sell high!” the complexity kicks in only when you try to figure out the low and high of the market.
The news flows confuse the retail investors endlessly: even when the markets were at 21,000, there were news flows that it would hit 25,000 to 30,000 within few months. This urged the investor to take the bold step and enter equities at that stage, and for those who did this, the scene is not looking very pretty alas!
The markets are trading at multi-year lows today, and many of us who did not sell during the fag end of 2007, have a sad story to tell. We take you through some do's and don'ts of surviving the current stock market meltdown.
Stay calm; don't panic!
Panic selling is a common phenomenon which grips the market when the going gets tough.
An expert cited that the current markets are 70 per cent driven by fear and 30 per cent by greed, and hence, the negative bias. Investments should be categorically driven by reasoning, logic and not by emotions. After every fall the market has only emerged stronger and this is evident from the major falls in the past.
The table below shows the past Sensex falls and how the bellwether recovered in subsequent years:
As can be seen the bellwether, 30-stock, BSE Sensex dropped sharply from 1,559 on October 9, 1990 to 956 points on January 25, 1991, a drop of 39 per cent. But the same index one year later (on January 25, 1992 topped 2,172 points) gave a return of 127 per cent and a return of 61 per cent by January 1994.
As one can see, someone who invested in peaks, saw troughs, but if s/he had waited patiently would have gained significantly from the stipulated levels at which s/he had bought. Another key point to note is that the deeper the cut, longer it took to heal.
Moral of the story: Those who stay calm and don't sell during meltdowns reap the rewards of their patience.
Averaging: A good strategyIf you have invested at a high, don't forget to invest when markets have fallen. That's how systematic investment planning, SIP, works.
To compensate your investments done when stock prices were high, use a SIP over 2 to 3 years to average out the same.
However, it is better to use mutual funds (MF) rather than equities to average your cost of buying a particular share. We have seen best companies see sharp falls (Satyam Computers is a case in recent times).
A diversified mutual fund could be the best option. In volatile times, you need to manage risks effectively and hence MFs make sense. One can use large cap funds to manage this risk as most of the stocks in such a fund are blue chip companies.
Use trading rangesThe market is likely to move in trading ranges (say the Sensex trading between 9,500 to 11,000 points in 2009) over the next 12-24 months.
In this period, you can exit whenever you see markets go up 25 per cent or so and buy again at levels that are 10-15 per cent lower.
We have already seen markets trading in a range of 8,000 to 10,000 for the Sensex at least two times in the recent past. Some of the ranges could be larger than this so do keep some money for a further spike. This will also help average out.
However, do not use this strategy after 18 months from today. You should then be looking at riding a bull wave which one should not miss out on.
Importantly, don't go the stock market way if you are not an expert. Stick to the time-tested formula of investing via SIPs in mutual funds.
Let go the bad ones and stay away from tips!
There's no point in holding onto spoilt eggs. They are only bound to spoil the look of the overall portfolio. Especially since one may have picked up a stock merely because of a tip passed on to you by a close friend of yours who knows a successful broker!
It is best to book your losses (sell your investments at a loss) and use the proceeds to buy other good stocks at a discount. Use defensive stocks in a bear market.
After every fall, there are some companies which will perish eventually, not everybody will have the strength to come out of a harrowing / excruciating hurricane.
Since most of the damage is already done, take calculated risks to average out the higher cost of investments you have made. Losses from equities can mostly be made up from equities. Fear and greed are emotions you need to overcome if you have to make money on the stock market.
Advice for you: Research / logic should be the base for your equity investment.
Do not follow tips blindly; add stocks/mutual funds in your portfolio only if you understand them.
Look at equities only after you have already planned for your safety and liquidity needs.
Don’t panic! When you sell in desperation, you always sell cheap.
Use the averaging route to curtail losses significantly.
Let go of the bad ones, do not get emotionally attached to your investments
A certain man planted a rose and watered it faithfully and before it blossomed, he examined it.
