Most of the investors are waiting for market to overcome the budget day shock given by markets and hoping that February should end fast and March should begin as earnestly as possible. Little did they know the second week of March 2020 will bring more blood on the streets literally (Dalal street became Laal street ), pun intended.
Most of these investors are new into the market and did not know how to react to such situations in market. Some of them only read about 1992, 2000, 2008 market crashes and personally not experienced them. This market crash is a kind of a graduation ceremony for new investors, while at the same time its a post graduation for 2000, 2008 graduates. If you survive 1992, 2000, 2008 and ongoing 2020 then you deserve a lifetime achievement award as well.
So as you are reading this article, did you notice any pattern in stock market crashes?
Congratulations, if you are able to see that
Stock Market crash is inevitable every 8-10 years.
Ofcourse capital protection in these times are the first priority. How to do that, lets read further on what strategies people can adopt
Case 1. Sell out 100% and wait to re-enter at lower levels
Thsi strategy is for people who
- Are facing Liquidity challenges
- Can’t sleep properly looking at downside in portfolio
- Borrowed money to invest
- Goals are near ( within 1-2 years)
Advantage with these strategy is you may not lose further capital if market goes down and may get a chance to re-enter at lower levels or bit higher levels when dust settles. Problem with this strategy is it is impossible for anyone to predict whether market has bottomed out or not. Will Market go down further in next 2 days or 2 weeks or 2 months. Nobody knows. Get away from people if they claim to know.
We may see occasional sharp upturn but may not be able to sustain it because economy will be impacted definitely due to most of world going into lockdown mode for few months.
You may need to decide a market point where you should re-enter
Case 2 Go opposite and buy more
Since such market crashes, most of the stocks fall even if they have good balance sheets, business , zero debt, so advantage with this strategy is you will get good quality stocks at throwaway prices and from these levels, they can return 15-20% CAGR in 5 years. Problem with this strategy is most of us go overboard and can’t classify what to leave.
In such cases adopt a simple strategy
- Create a watchlist of quality stocks and buy from the same watchlist
- Don’t look for tips.
- Plan your investment in a staggered manner instead of putting money in single go
- Don’t borrow money to invest
- Invest the money which you don’t need for next 5 years
- Prepare to see more downside to market and holding these investments are the key for longer term
Correct portfolio allocation including cash in hand at all times is the key to survive these crashes.
Case 3- Hold
This strategy is for people
- Who are confused and not sure which strategy one should adopt
- Who have long term views on equity but not sure what to do in uncertain the atmosphere is .
- Who has no money available to invest right now
- who do not need to sell out as no immediate money requirement
Under this strategy, neither you buy nor you sell but wait for the dust to settle down to take the next course of action.
What i am doing in this market? My answer is Case 2.
- I had a watchlist and i am making full use of it.
- I have a process for staggered investment over a 6 month period and i invest whenever market panics. On budget day, on LC days. That kind of panic selling gives me an opportunity to buy stocks that I always wanted to buy, but decision was deferred due to valuations.
- I am still not chasing expensive stocks and wait for them to cool down a bit more before initiating positions
- I would recommend this strategy if you have cash in hand and can hold shares for longer term ( more than 5 years). I am banking on the process i have adopted and still ready to take hit on 30% of stocks turning turtle in years ahead assuming 70% investments will easily cover the returns of 15-20% CAGR.
I would not recommend to sell out and sit if you have not borrowed money and are not facing immediate liquidity issues. But for sure remove dud stocks and put that money into other quality stocks
Whatever strategy finally you adopt. don’t be a blind follower
Read more on Blind follower here
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