It is hard to explain the psychology of the stock market. Whenever the prices of laptops or toothpaste come down, we are happy to buy them. Yet, when stock prices tumble following a crash, we hesitate to pick them up. Even stock market veterans become unnerved when the market behaves erratically.
Dealing with a market crash is not easy. It takes a lot of effort to stay calm and focused when turmoil erodes chunks of your investment portfolio. The next time you are faced with a situation like this, follow these simple but effective steps.
Every downturn comes with upsides too. Some stocks defy the market trend and rally. If you study previous market crashes, you will find that some stocks have generated good returns. These stocks are very different from the speculative breed and have stood the test of time. Dividend-paying stocks could be your choice. The dividends from these stocks can act as a source of income during both bear and bull markets.
Perhaps the most difficult part of the exercise is to soothe your frayed nerves. Take a good look at your portfolio. A 10% correction means your equity portfolio has taken a considerable hit. If the battering is more than the market fall in percentage terms, justify your reasons to stay invested. Maybe you have long-term goals, so staying invested will be a good idea. The so-called rule of 100 is also worth exploring. In this, you subtract your age from 100. The figure you get should be your percentage of equity exposure, while the rest should be in fixed-income categories like debt funds and fixed deposits.
A market crash can offer an excellent opportunity to buy stocks at attractive prices. Analyse if your portfolio is diversified enough. It may just be the right time to pick up quality small cap or mid cap stocks to redress the balance in your portfolio. Remember that the stock market has consistently generated 8% inflation-adjusted return over the long term. Hence, a market crash is only a blip and a bullish phase is never too far off.
Like cricket, the stock market rewards those who play for the long term. You may be a good pinch hitter, but that alone will not always ensure your place in the side in all formats of the game. But if you choose the role of a playmaker, you are more likely to do better in all formats. You will make money in the stock market only when you have a long investment horizon in mind. No matter if you win Rs 2 lakh or lose Rs 5 lakh in a trade, remember that it will even out if you stay invested. Thus, you will also know exactly how to react during volatile market conditions.
Checking your portfolio daily will do more harm than good. Review your investments once or twice a year. This way, you can guard against anxiety and fear that may be triggered by a market crash. Remember that you can reap the benefits by staying invested for the long term.
There is no room for emotion in the stock market. Staying invested is more rewarding than panicking and exiting when the chips are down. Your stock market investments should not cause a rush of adrenaline. If you stay focused and develop good financial discipline, it will not be too difficult to tide over a market crash.
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