This article tells long term equity investors how to react at the time of a major market-wide correction.
I usually don’t write about short term market movements. And I don’t offer buy or sell calls – not for individual stocks, and not for the market as a whole.
But right now, we have a special situation. And so, I have to make an exception.
Indian markets (and in fact, the markets in most countries) have corrected by nearly 20%, with many stocks having corrected by more than 50%. Most people are wondering – What should I do after such a massive fall? Should I sell whatever I have, so that I can salvage whatever I can? Or should I buy more? What if the market goes down even more?
Here is what I feel you should do. But before we move on, the standard disclaimer from me: As usual, my opinion and analysis is only for long term investors.
My only advice for short term “investors” in shares: Please invest in stocks, don’t trade. (Please read “Stocks – The winning bet for the long term” for more on this)
If you already have money in stocks
Don’t panic! This is not the first correction in the history of markets, and it won’t be the last. Market keeps going up and down in the short term due to various factors. As a long term investor, you need not worry about it.
You have chosen companies which are leaders and have been performing well (in the markets they operate in, not the stock market!) – This correction doesn’t change that fact!
Remember, the fundamentals of the Indian economy and Indian companies have not changed. The correction is due to factors that are totally external. Yes, our economy and our companies can’t remain totally insulated, but the actual effect would be rather small, and doesn’t warrant such a deep correction.
Stock prices of many companies had risen very fast in the past couple of months, and were not justified based on their fundamentals. Some day, the prices of these companies had to come down. The market has got an excuse, and the correction has happened!
But along with these companies, the stocks of good companies have also suffered – that’s because at times of panic, the market forgets to distinguish between companies. So, if you think for a moment, it just means that good companies are available at a deep discount!
This brings us to the next point.
If you have cash
Invest! Don’t get overboard, and don’t invest everything you have. But this is a great time to start putting your money in the market. As I mentioned before, this correction just means that many great companies are available at a deep discount!
Do you panic when a store declares a sale? Of course not! Then why panic now? Don’t you buy things when they are on sale? Use your common sense, and buy good companies that are available at a discount.
Yes, there is always a possibility that the market would correct further. That’s why don’t invest all your cash in one go. Start investing now, and keep investing periodically till valuations remain this attractive, or become even more attractive!
And as I have said before, as a long term investor, do not worry if the markets go down further – a good company remains a good company irrespective of its stock price!
What to buy
My advise, as always, is to buy units of good, diversified equity mutual funds. (Please see “Direct investment in Stocks versus Mutual Funds (MFs)?” for more details) This is especially true in turbulent times like this.
But in case you want to invest in individual stocks, please go in only for large cap, blue-chip companies that are good for the long term.
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