The Sensex is closing in on 39,000 and the Nifty is near 12,000 point level. In the Indian stock markets, history is being made almost every day with equities reaching new highs, and eclipsing the level soon. Centuries of wars, fights and poverty have somehow made Indians very conservative and cautious. Instead of rejoicing the fact that their portfolio wealth has grown, many new and old investors are a worried lot today. What will happen if there is a crash? What to do now that markets are at all-time high? Should I invest more? Should I reduce exposure? Let us get some answers.
What Will Happen If There Is A Market Crash
Stock markets go through downturns just as they ride bullish phases. If and when stocks fall, your investments will fall by the extent of the fall in the stock. If the market drops by 10%, it does not mean your investments too will drop by 10%. The word ‘market’ is loosely used to talk about Sensex or Nifty, which are composed of 30 and 50 shares of big companies. If you equity investment portfolio has other shares, the impact will be very different. Usually, stocks of very large companies fall lesser than stocks of small and mid sized firms.
There are always some factors that drive the market downwards, just as there are triggers that pull it up higher. Global meltdown fears, a war, big swings in currencies, geopolitical tension, trade wars, a fraud or scam affecting a country or countries…the list is endless. Basically, stocks correct when there is fear. This fear, even if unfounded, forces people to become risk-averse. Hence, they start selling. When the number of stocks sold is more than what people bought, there is demand pressure and that compels a correction in stock prices.
If you feel that correction in specific stocks is unwarranted or the current market value (post correction) does not reflect the actual higher value, you should increase exposure to such stocks. In case you are undecided, just wait and watch till you can build some conviction. Buying and selling is after all an action linked to our beliefs. If you do not have adequate belief in the action, it is better to sit out instead of committing too early.
New and Old Investors
New investors are those who have just arrived in the stock market, or have very little investing experience. A large part of investors in the Indian stock market are new ones. They have joined the party after reading, listening or knowing about the fantastic performance of stocks in the last few years. They are hopeful of riding the bull market.
When a new investor encounters a bad investing experience, it is easier for them to become disillusioned. Hence, new investors should never start investing with 100% equity exposure. Try not to invest directly in stocks if you are a new investor. Use the mutual fund or ULIP route and use a professional fund manager to oversee your investments through those structures. Plus, do not take exposure to 100% equity products; go for hybrid products which have lower equity exposure and higher debt exposure. As your maturity level rises, you can go for higher equity allocation.
Old investors, with at least 8-10 years of investing experience, are a different lot. They should be guided by asset allocation principles irrespective of bear or bull markets. This means if you have decided 75% of your money will be in equities, stick to that. If you have decided 50% of your money will be debt and 10% in gold, maintain that proportion. If one of the asset classes does well or does not do well, review your portfolio and look at your asset-class wise exposure. Take the necessary action to rebalance. All investments should be done based on the premise of whether you need to buy or sell to achieve the desired asset allocation mix.
Do remember even experienced investors can fall prey to greed and fear emotions. Hence, it is absolutely important to maintain calm in the face of a sudden market reaction if and when such a thing happens.