Why People Sell During Market Correction
What does an investor do when a market correction happens. The stock market is the alley of surprises that is driven by two emotions: fear and greed. While most investors have the urge to get rich quicker, there are investors who are too timid to understand the market volatilities. Succumbing to such emotions can be detrimental to investor portfolios and can impact stock prices and the economy as a whole. It is always better to ignore the trend and focus on disciplined long-term investments as emotion-driven decisions can cost you dearly. It is critical to understand your financial capabilities and asset allocations accordingly when the market is either driven by fear or greed. Let us understand what an investor must do while the market correction happens.
Significance of fundamental based investments
Volatility/instability of the market makes people find themselves vulnerable resulting in costly mistakes. The element of fear and greed drives the investor psychology to either buy random stocks in the bull market or sell off hastily in the bear market. The key to sailing through such times is sticking to the fundamentals. Choose a suitable asset allocation, remain flexible to a point and rational while making an investment decision to change your plan of action.
How can one take advantage of the sentiments of the market?
It is very natural for any investor to become a part of the herd where people sell off because of panic and buy out of sheer excitement. A wise step as difficult as it is will be to pick up assets while they are on sale and sell them when euphoria hits the market.
Why should one not sell during a correction?
The psychology of fear in the market volatilities had a long history of its own. A market crash can impact the portfolios negatively causing anxiety and vulnerability. Consequently, investors are more inclined toward selling off their holdings and taking a back seat until the market stabilizes. Here are a few reasons why one should not succumb to temporary market volatility.
- Downturns in a market tend to be followed by upturns. We need to understand that not always the economy of the market stays at the same levels. Recovery from a market crash is inevitable in the long run and that is what should drive one’s plan of action. It is always worth it to sit tight and wait for the market to recover.
- Timing the Market is a difficult task. The history of the stock market depicts various instances of crashing of the market and its subsequent recovery in the long term. For example, the Harshad Mehta Scam (1992) saw a Sensex plunge of 54% in a year and a 127% recovery in the next 1.5 years. A similar instance of the Asian Crisis of 1996, witnessed a plunge of the Sensex by 40% and its recovery of 115% in the next 1 year.
- Succeeding years saw similar patterns of downturns and upturns in various times like Tech Bubble 2000, Lehmann Crisis 2008, and most recently Nifty has plunged over 30% with the lockdowns imposed due to the pandemic of 2020. However, the market has recovered sharply and made new highs.
- These market correction help us to understand that no one can predict the stock market, the only thing that can be predicted is Correction is temporary! Growth is permanent!. Don’t panic sell in Fear. Hold your investments for a longer duration until you achieve your goal.
- Long-term Investment plans go a long way irrespective of the market volatilities. If an investor envisions his portfolio for the next 20-30 years investment time horizon then a sound investment strategy based on a well-diversified portfolio with a mixed class of assets will keep the volatility in check.
The right strategy for favorable long-term returns
The answer is: Don’t Panic!! The key takeaway is knowing your risk tolerance beforehand and how the market instabilities can affect your portfolio.
- Portfolio diversification can help you mitigate the market risk to a greater extent. One can also experiment with stock stimulators for better Insight and understanding of one’s emotional response to it.
- Knowing your financial capabilities is important but preparing and limiting your losses is even more important. Investing only in stocks can result in significant losses when the market crashes. So it is always better to hedge your portfolio through strategic and diverse investments options like mutual funds which consist of well-diversified fund categories like pure equity, hybrid funds, debt hybrid instruments, asset allocators, Balanced Advantage category, and many, more options, pure debt instruments, some portion of your investments in short term parking funds, little in FD, and some liquid able surplus.
- Always focus on the long term! With the help of a long-term focus will enable you to perceive a big market drop as an opportunity for wealth creation, rather than posing a threat to your hard-earned savings.
KhasnisPrimeWealth does the overwhelming task of understanding Market trends and aligns your goals with your financial capabilities through personalized portfolio management.
It is advisable to take experts’ advice during the time of market correction.
August 11, 2021