I came across this forwarded message on WhatApp recently. I know it’s not funny, not anymore. Coronavirus and daily news updates have really disturbed our physical, mental and financial health.
This event has caused panic globally and markets all over the world have reacted to it. Events like this had always created fear in people’s minds and the markets had crashed badly. We are human beings. We fear the unknown. That’s why we were afraid to go in the dark when we were kids. Markets react in the same way. People don’t need a rationale or results of an experiment to prove that there is a problem out there. Just by hearing the news about it, people react and cause a negative wave in the market.
You and I as retail investors cannot really predict how and when the market will react. But when it happens, we will know for sure, like the way the market has crashed over the last week. NIFTY has fallen almost 1151 points and SENSEX more than 7000 points. NIFTY fell almost 22% from it’s all time high point on 20th January 2020 when it was at 12430.50. Yesterday, NIFTY closed at 9590.15. That’s a terrible 868 points fall in a day.
But for a normal person who has invested in the Stock Market either directly or through mutual funds, what does this really mean and what should we do in such scenarios? Remember, during all the market crashes in the history of the Stock Market, the market has always recovered. Nobody can predict how long will the bad phase remain in the market and when it will bounce back, but it will do it for sure. And if you can survive during the bad cycles of the market, nobody can stop you from benefiting from the good ones.
Here are four things that you should do in such market crashes,
1. Do not sell in panic
Even if the market is tumbling down, it will certainly not reach zero. So, don’t panic. This is not the right time to close your positions and book losses. If you hold onto it for a little longer, you will recover your losses. Don’t focus on the losing investments for now. Panic causes more trouble than reality.
2. Continue with your monthly investments
If you invest every month into stocks or you have an ongoing SIP, do not stop it. With discounted stock prices, you are now going to get more units (or stocks) for the same invested amount. So, for example, if you invest ₹10,000 per month and get 20 units worth ₹500 each, considering the unit price has dropped to ₹400, you will get 25 units now.
Same with your direct stocks investment. You will get more stocks for the same amount of invested money. When markets recover, they are going to grow exponentially.
3. Do not go on a shopping spree
Do not start using all of your capital for buying stocks because those have become cheap. The reduced price does not mean the lowest price. What you can do instead is spread your buying across multiple purchases.
For example, buy stocks with only 10% of your capital. That way, if the market falls further, it will cause less damage. If the market rises again, you can buy more stocks with the available funds. Remember, this is not Averaging. There is a major psychological difference between our approach and averaging. This is spreading your buying smartly to smooth out the risk.
4. Hedge your positions with Derivatives
If you are an advanced trader, you can make use of Futures & Options (F&O) to hedge your stock investments. Hedging is like insurance. You pay a certain premium to protect your capital from eroding due to such market crashes. While your stocks lose their value due to falling prices, you can gain from the F&O segment to even out or at least to cover some of the losses you have encountered in stocks.
Remember, F&O is only for advanced investors and traders. Do it with caution and only with the right knowledge.
Finally, learn from these events. Markets is a tough teacher.
So, what is your thought about this market crash? How did you manage to survive?