Surviving a market correction and growing in it

     A stock market correction is explained as a fall in stock prices by 10% or greater but not more than 20%. As unnerving as this fall may seem, it is in fact also healthy and often the absence of it for a longer period can wreak havoc which would take longer and be more complex to unravel.

A fall of 20% of more in stock prices would mean a bear market, usually a bear market lasts longer than a market correction.

A stock market correction despite it’s intangible nature has severe repercussions which cannot be wished away but rather calls out for measures that need to be acknowledged, addressed and reviewed.

What causes a stock market correction?
There could be several reasons for this as stated below:
  1. Over- valued markets
  2. Change in the fundamentals of the economy
  3. Tensions or war/war like situation between two or more states

“There are decades where nothing happens, and there are weeks where decades happen.” — Vladimir Lenin

How do you survive a market correction?
  1. Surviving a market correction is more about your EQ than your IQ. In fact during your entire investment journey you’ll be needing little to no IQ at all, yes you read that right.
  2. As contradictory as it sounds, during both a Bull and Bear market, your ability to filter through a varying range of emotions will eventually settle whether you make rational or irrational decisions.
  3. This in no way should be inferred as a simple option between the two, the selection of one over the other being the final nail in the coffin to your outcome.
  4. Whatever you decide and whatever transpires is a cocktail of numerous factors and that in many ways is a blessing or curse, depending on how you view it in the field of equity investing.

You ponder and worry about things you have no control over and the more you try to control it, the hole gets deeper.

The supporting cast
  1. If you are a movie buff or merely an occasional viewer, notice that most if not all movie awards around the world have one for ‘supporting cast’.
  2. The supporting cast is neither the lead nor the villain, his presence may seem trivial but his absence would lead to the entire plot falling apart like a pack of cards.
  3. When the markets are under stress, the same would be reflected in your portfolio naturally.
  4. During such times try neither to be the hero, nor the villain but the least you can and should do is attempt to be the supporting cast.
  5. If you have a running SIP then let it continue and if you have invested via the lumpsum mode then do not redeem.
  6. With SIP’s keep in mind that if you can buy at peaks then you should buy at bottoms, if not then the very purpose of having SIP’s is questioned.
  7. You do not abandon your umbrella when it is raining, in fact you gather more forecasting the worst case scenario.

A hero would mean buying more to either average old investments or enter into new investments at attractive valuations, it’s absolutely fine if you do not see yourself playing this role.

A villain would mean throwing in the towel and undoing all the past good work and letting go of the opportunity to avail averaging on old investments. The villain would usually be seen on the wrong side of things but remember it is only a movie so nothing’s real, the same is the case with your portfolio.

When your portfolio is down by 50%, yes it is down but these are still notional losses. It is only when you act and redeem that you make these notional losses into permanent losses, don’t be a villain.

The supporting cast would go about his job as usual knowing very well what is expected of him and enacting the same, strive to be that guy. As trivial as your role may seem at the moment, it can only be understood and appreciated later on.

Understanding human behaviour
  1. Humans are social beings and have a need to be socially accepted, this need to be accepted can often be seen when one imitates the other and often without even realizing that he is doing so.
  2. Panic sells and sells quick and it takes away your most crucial ability as a human being, your ability to think.
  3. This is why the most important person after you and besides you when it comes to your portfolio is the one who influences it the most and no, a business news channel cannot be that one. Avoid them on most days but avoid them the most on weak market days.
  4. You have to be a firm believer in a better future, both globally and domestically.  A better future economically would mean better economic conditions and thereby a healthy stock market.

As brash as it may sound, if you do not visualize a better future, you have no right being in the stock market.

To be an investor, you must be a believer in a better tomorrow. - Benjamin Graham

How to grow in a Market Correction
   As alien as this may sound and not to belittle what investors go through financially and otherwise during such cases, it is very much possible to benefit from a market correction.

Keep in mind that market corrections are more frequent that bear markets thereby giving you more chances to enter at attractive prices.

Averaging your portfolio
  1. It’s quite a simple thumb rule, if you were all right with investing at market peaks then you should be all right with investing during a market correction too. If not then the very premise and your logical reasoning to invest needs to get a very serious revisit.
  2. You cannot undo when you have already bought at peaks but investing at lower levels help you average out your overall portfolio. This is of course assuming the condition that your current investments have strong rooted fundamentals.
  3. If you have a running SIP then you would be doing that anyway unless you for reasons that cannot clear the test of logic stop it, don’t be that guy.
  4. If you either feel your current investments no more qualify as fundamentally strong or you cannot investor further for lack of funds, the least you can do is stay put.

Reviewing your portfolio
  1. What you see from the periphery and what you experience yourself are poles apart. Riding a roller coaster could seem an easy or possible task from the outside but nothing can prepare you for the adrenaline rush you experience yourself when on the ride.
  2. Same is the case with equity investors, until and unless you have not invested your own hard earned money, experienced a major correction or witnessed half your portfolio vanish, you cannot declare your decision a prudent one to invest or not.
  3. We are all long term investors until the markets see a major correction, this is precisely why undertaking an unbiased risk profiling becomes non negotiable.

You cannot justify bad decisions by good intentions.

  On 15th January 2009 Captain Sullenberger of US Airways Flight 1549 steered 155 passengers to safety by making an emergency landing in the Hudson river. This was possible because as soon the things weren’t going as planned, the pilots stuck to their checklists and realized what was wrong and what to do.

Equity investing is not much different, things will not always go as you had planned for but there are boxes to be ticked before you move ahead. If you do not know what went wrong, you cannot rectify it and if you cannot rectify it then the inevitable comes more sooner then envisaged. This eats into crucial time which could have otherwise been utilized to undo the errors.

You need to get certain boxes ticked before you go ahead, some of these are negotiable and some non negotiable. For eg you can reduce the amount you wish to invest but you can never reduce your time horizon to merely a year. You cannot expect the same volatility and returns from a small cap fund as you do from a large cap fund.

You may learn and unlearn certain points along the way but the fundamentals will remain glued.

Humans are as much alike as they are different. Two people with the same amount, time horizon and goals can have different risk profiles.

Personal finance is more about the former than the latter. You need to do what is good for you and how much bad you can go through, you are not here to impress anyone and this is not a popularity contest.

Is your portfolio diversified?
  1. Correction or no, this is a major cause of concern for most investors.
  2. Diversification has so many layers that merely having an overview of your portfolio may not suffice to arrive at a meaningful conclusion.
  3. A market correction is a great time to study whether your mutual fund portfolio is really diversified or not and this is not only limited to your portfolio’s ability to withstand a major hit.
  4. If you have invested in two schemes of the same fund house, having the same fund manager with the same strategy and where it is possible for both schemes to replicate each other the how exactly is your portfolio diversified?
  5. According to SEBI mandate a Large cap fund needs a minimum of 80% of its investments into the top 100 stocks as per SEBI classification. A Multi cap fund on the other hand has no such restriction, meaning if it wants it can replicate the Large cap fund exactly the way it is then it can.

In such a case how exactly have you achieved diversification?

Diversification is not merely allocating to varying fund houses, categories or amount. It is far more detailed than that and needs a thorough analysis. It is very much possible for two schemes of different categories, helmed by different fund managers and of different fund houses to have the same style?

A market correction although not an ideal time to study your mutual fund portfolio’s diversification can actually help you better understand your portfolio.

Did you allocate to withstand volatility, are all your aggressive funds in a free fall and are they better off or worse than the rest. Are all your funds reacting in the same manner, if no then what are the possible reasons and did you plan for the reasons or is that a mere coincidence.

If yes then your entire planning to achieve diversification has been an abject failure.

Click Here to read about how to diversify your portfolio

The need for emergency funds
  1. Emergency funds are still not a major rage and when one studies why most invest or their intention or perception, it is quite simple to understand why that’s been the case.
  2. Having an emergency fund would mean acknowledging the worst case scenario and most investors perceive or expect the movement of equity markets in a linear trend.
  3. When things go south and they will occasionally it highlights the relevance and importance of having an emergency fund which could be accumulated either in a debt mutual fund or a fixed deposit. The important thing is it exists and is highly liquid.
  4. A market correction teaches you that you should not be investing in equities for short term and that you should always focus on your needs before your wants.

It’s quite simple really, hope for the best and prepare the worst.

Imagine a scenario where a major correction wipes off 50% of your portfolio and you are in dire need of money due to an emergency with no separate emergency fund kept apart, you now have no other option than to book your losses and exit.

Now that’s a heavy price to pay for poor planning, not adhering to proper advice and thereby even being too scarred to ever invest in equities.

This is not a place where you flirt, this is a place where you commit.

The effects of a market correction on your goals
  1. We often invest with a particular goal in mind be it your child’s education, wedding or even your own retirement.
  2. Many investors often make a simple yet very brutal mistake of not getting the time horizon right.
  3. Imagine you need the money irrespective of the goal by 2030 and that very same year a bear market sets in, what do you do in such a situation?
  4. If your goal is for 2030 then your portfolio should be constructed with a view to be able to redeem anytime between 2028 and 2030 and not 2030 itself.
  5. Bear markets as historically seen last for about a year, can you afford to postpone paying off your child’s education fees for a year? No !

Same is the case for most if not all goals, this stems from a lack of proper planning or not resorting to professional advice.

Some common questions relating to a market correction

Are mutual funds still a good investment?
Whether mutual funds is still a good investment should not be brought up because of a market correction because volatility is a feature of equity investing and not a drawback.
In fact the pop up of this question should rather lead to you questioning yourself whether you have understood the basics of equity investing or not.

When should you switch mutual funds?
Not during a market correction and definitely not due to a market correction. If you ticked off every box of your checklist before investing, this question shouldn’t need to be answered.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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