The stock market has time and again proven that emotions should hold little to no value while investing.In 2020, we simply saw the market reiterate the same. The benchmark indices observed a correction of about 40% between February and March.Many investors and traders panicked and pulledout their investments. A few were also caught by greed and traded heavily in a volatile market.Only the ones that stayed invested and did not blur their judgment by any emotion were able to reap profits.
Today, the respective indices are trading at their all-time highs – or more than 10% higher from where they were before the market meltdown even came into the picture. It is the beauty of the market. In the history of all stock markets, whenever faced with adversity, the markets have only come out stronger.
Nevertheless, you must always keep these things in mind while managing a stock market meltdown.
Don’t invest in a lump sum:
You should never invest in a lump sum within the market. Rather, your investments should be in an SIP format. The biggest benefit of this approach is that even if a market is under free fall, you end up averaging your purchases. Since a market ultimately moves in an upward direction, you’re likely to receive handsome returns later.
For instance, on the 1st of January 2020, a lump sum investment in 12 units of all Nifty 50 stocks would’ve given you a profit of about Rs. 17,000 to date. On the other hand, had you purchased a single unit of each stock every month, your profit would have been more than Rs. 35,000.This is the advantage of spacing your investments.
Long-term investing:
Long-term investing is another great way to beat the market blues. During meltdowns, the market is in its most volatile state. A few investors believe that the market has bottomed out and take a bullishposition. Others believe that it will sink further and adopt a bearish one. The prices are largely a reflection of how these two opposing forces interact with each other. They have limited relevance with the ground reality as speculation largely governs the market. You must remove all speculation from the perspective. Justavoid using short-term indicators and keep your focus on long-term returns.
Diversification:
Sometimes, even though a sector or a group of stocks might do well, a related stock might not perform as brilliantly. It might even end up tanking. As an investor, whether there is a meltdown or not, you must always diversify your portfolio. Make sure that you invest in at least two to three unrelated sectors. Also, an adequate weightage should be given to large-cap, mid-cap, and small-cap stocks as per your risk appetite. For instance, if you want high returns, invest 60% in small-cap companies while investing the remaining sum in their larger counterparts. If you are risk-averse, invest 70% in large-cap stocks and 30% in small-cap and mid-cap ones.
Invest in quality stocks:
You must identify and invest in stocks that havea proven track record in the market.They are more likely to hold their ground during market volatility. Make sure that quality stocks such as RIL, Marico, Titan, KEI Industry and RedicoKhaitan that have asolid revenue stream and are backed by good promoters are included in your list.
Swear by Valuation:
Try and understand that stockvaluationshavecertain significance. They correlate the stock prices with real industry metrics and give a fair idea about how the business is faring. Avoid the overvalued stocks that does not provide margin of safety. Invest in stocks which has reasonable valuation and a growth story. Though another meltdown isn’t expected anytime soon, it is a part and parcel of the market growth. So, keep these points in your mind and make them an integral part of your trading strategy, especially when times are uncertain.