As fears of spiraling inflation and rising interest rates gripped investors across the globe, it was evident that Indian equity indices would see a steep correction following weakness in global indices. Stock market downturns such as these occur time and again. And they take place for various reasons. Sometimes the changes are related to excessive market valuations after an extended rally. In other cases, they may be due to external events like COVID-19 in 2020.
The pertinent question here is how you can be prepared for such market corrections. To that end, let us look at 7 strategies that investors can embrace in the event of a steep stock market correction.
Resist the temptation to make panic sales
Any investor would want to sell off their stocks and equity holdings when the market crashes. And, in panic, they do so at depressed prices. History, however, proves that the best and worst-performing days often cluster around the same time. Over the last 20 years, the best-day-worst-day gap has been within a month. Therefore, the best solution lies in doing nothing and simply letting your SIPs continue.
Resist the urge to make panic buys
Buy equities but don’t panic-buy index funds or invest in blue-chip companies without proper risk assessments. The right thing to do is to plan before the market tanks. You should know your appetite for risk to be less panic-stricken when the market stumps.
Keep your portfolio rebalanced
Rebalancing is an investment strategy that reduces portfolio risk, and in most cases offers better risk-adjusted returns to investors. This is done by buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state or the targeted allocation. Take a stock of your financial situation, such as the kind of assets you own, how much, what are your goals, and how do you want to build your portfolio. You will then know where you stand and how much buying and selling you need to do. Rebalancing helps in managing portfolio risks, especially at a time when the markets are irregular.
Take advantage of tax laws
A fall in the stock markets can be an opportunity to indirectly increase your post-tax ‘return on investment’ by using a tax-saving technique called tax-loss harvesting. Like one need to pay tax on capital gains, one can also save taxes on a capital loss by offsetting it against a capital gain. Investors can use this technique throughout the year and use it when the markets tank. This technique serves as a great way to offload some of the weaker stocks or funds in your portfolio and replace them with potentially higher growth funds and securities.
Protect personal finances
Create a personal accounting ledger for yourself and ensure that a stock market dip is not impacting your expenses like paying utility bills, tuition payments, rent, and other essentials. Also, be prudent in your expenses and start building up a good emergency fund. It is also important to manage debt as well. Refinance your existing debts like a home loan, personal loan, or credit card.
Invest in equities carefully
Invest in instruments such as NPS or ULIP accounts that come with multi-year lock-ins, as these equities can boost one’s retirement funds and long-term goals corpus. Also, a significant stock market fall can be an opportune time to invest in stocks and mutual funds, especially if you are adept at identifying pricing mismatches and bargaining.
Focus on long term
It is a fact that stock markets don’t go to zero, the economy always recovers, and stock prices do grow and reach new highs in time. Volatility is an integral part of the investing process; therefore, keeping a level head and a keen eye on your long-term goals is wise.
Attributed to ET Money.