Slowdown in the stock market comes as a challenge to investors. Losing money hurts every individual whether the amount invested is small or big. Declining markets test the patience level of investors. At such times, the market itself is not very good at telling the investors when to jump in with both feet and when to keep well away from it. In such a market, if fear sets in, you might consider releasing yourself from your investment plan completely, which can do more damage than anything else.
So do you feel like banging your head against the wall? Or wondering whether you should simply diversify across all asset classes such as equities, debt, mutual funds, and commodities? Dealing with a future contingency is one thing and watching retirement assets evaporating into thin air is another. Considering the other side, crashing markets can be a good thing too, as it provides us an opportunity to get in at the bottom and wait for the markets to rise. This can be of benefit to investors looking to stay on in the market for a longer term and those looking at long-term benefits. Many investors want to make money in a short period but one needs to understand that this is generally not the way the equities behave. There are periodic corrections in the market and the investor has to be prepared for the same.
The investor should, therefore, take some measures to survive the slowdown of the market. The following can be some of the strategies that can be of help to the investors:
Making the appropriate investment allocation
To better understand how proper asset allocation can add value to an investment plan, first lets have a look at what is it all about. Looking at the investment expanse there are a lot of asset classes (which loosely refers to investment avenues) and as an investor you might not know,
a) which asset must form part of your plan and
b) if it must then how much of it should you own.
The investor has a wide choice among the asset classes namely, equities, debt, mutual funds, etc. and how much you need to own varies from investor to investor. Along with the right allocation you need to be sure that every asset actively plays in your portfolio. If the investment portfolio is made keeping in mind the risk tolerance and investment objective, then a downturn shouldn’t bother you. For instance, if you need money after a few decades and you are an aggressive investor, you can be invested completely in stocks. But you should always accept the fact that along with gains come losses.
Take the benefit of rupee cost averaging
With a topsy-turvy trend, the market may not give a clear picture. In such a scenario, one needs a careful and sensible strategy that would minimize the cost of buying an investment option and that would in a way act as a shield against abrupt risks. One of the strategies for this is called Rupee-Cost Averaging (RCA). RCA is basically investing a fixed amount of money every month into a stock. In RCA, a certain number of shares are bought irrespective of the price, which means more number of shares at a lower price and fewer shares at a higher price. By doing this, eventually, the average cost per share comes down. For example, with your fixed amount of investment you buy 15 shares at a lower price and 10 shares at a higher price. So here, RCA subsides the risk of investing a huge amount in a single stock at the wrong time (i.e. at an inflated price), by taking the average cost per share down in a falling market. The low average cost per share will help you gain better profits when the market moves up in the long term. If the market falls this month, you may lose money on the shares bought last month, but this month you will receive more shares, which, will help in offsetting any losses occurred in the future.
As the financial markets are in a constant state of flux, they tend to move in the same general direction over fairly long periods of time. The Bear phase and bull phase can last for months, if not years. Because of these trends, rupee-cost averaging is generally not considered as a short-term strategy.
Profit from falling stocks
Often, investors in a slowdown get their money placed in fixed return instruments such as bonds or debt mutual funds because they pose less of a risk. Now as the money is withdrawn from the stock market due to stock sales, the supply exceeds the demand and the prices of the stocks are further driven down.
On the other hand, falling markets do offer some great benefits because they provide the investors with an opportunity to buy into stocks at bargain prices. A substantial fall in the prices, before recovering, provides the investor with an opportunity to buy in at a low price.
Consider defensive stocks
The late Sir John Templeton’s simple mantra of investing was: “Buy at the point of maximum pessimism”. The investors who look forward to maintaining positions in the stock market should adopt a defensive strategy of investing in companies with strong balance sheets and a long operational history, which are considered to be defensive stocks. This is because these companies tend to get less affected by an overall downturn in the economy or stock market, making their share prices less sensitive to a larger fall. On the other hand, the unsound companies with not much growth happening are the ones to be avoided because they might not have the financial security that is required to survive downturns.
Investing in a downturn is actually not that different. But it takes tremendous courage to buy when there is widespread gloom and panic around. Therefore, one needs to take care of the right investment mix between wealth-growing and wealth-protecting. What is unusual in this case is that it becomes very difficult to follow a disciplined strategy when markets are going haywire. Investing in such times becomes a test of your character as much as of your intelligence.
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