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4 tips to help you prepare for the next market crash

Manvi Agarwal
·4-min read

The stock markets have been extremely volatile after they fell in March 2020. They somewhat recovered in April 2020 only to fall again in May and are now back to their April levels.

The recent recovery has everyone surprised. Experts are questioning this rally and certain it will not sustain. Covid-19 cases haven’t slowed down in India, April industrial production numbers are dismal and expected GDP numbers have been downgraded by various rating agencies. But none of these factors has dampened investor spirits. It is safe to say that economic realities, corporate earnings and the stock markets are all completely out of sync with each other.

A lot of the recent uptrend has to do with liquidity infusion across the world. The unlocking 1.0 in India has also been a contributor to the rally although there are still lingering questions whether it has any legs to walk on.

Unfortunately, every piece of good news comes along with bad news, making it difficult to predict how long economic recovery will take. Vaccines are still far away but there seem to be several drugs underway. The US is expected to announce more stimulus in the month of July 2020 injecting more liquidity in the system. There is also the risk of a second wave in India which is already active in other countries. Overall, there is still a lot of uncertainty culminating into continued market volatility. Top investors across the world believe the same and continue to remain cautious.

But what should the individual investor do?

When the markets crashed a few months ago (March 2020), there is a good chance you were unprepared to deal with such blows to your portfolios. The absence of a financial plan to guide you amidst such uncertainty can be very unsettling. So, here we outline some tips to help you prepare for the next market correction:

  1. Keep some cash in hand: It's a well-known fact that trying to time them is a futile exercise. No one can predict when the markets will fall. And these uncertain times worsen the situation giving rise to volatility. You can’t invest all your savings now or exit the markets entirely at the risk of missing out on the rally to recovery. So, in such situations, a good strategy is to keep some cash with you and buy stocks at dips.

    Continue with your ongoing SIPs. It will average out your buying costs.

  2. Now is not the time to get adventurous. Avoid fundamentally weak companies: Governments across the world have announced large stimulus packages to nudge demand in their respective countries. This massive liquidity injection has led to the recent rally in the stock markets. Giving lifeline to undeserving companies (stocks) with weak fundamentals. This puts you, the investor, in a dangerous position. As there are plenty of fundamentally weak stocks trading at high valuations. Try to avoid such companies. Focus on buying companies with a strong balance sheet with great potential at fair prices. Companies that will not only do well over the long-term but are strong enough to sail through these uncertain times.

  3. Reduce your exposure to equity: I would never advocate changing your portfolio’s asset mix (equity vs bonds) as the stock markets move. Only your goals define your portfolio mix. But in these uncertain times, investors closer to their goals must consider reducing their exposure to stocks, insulate their portfolio from volatility.

  4. Examine your investments in Liquid (bond/debt) Funds: Contrary to popular opinion, liquid funds are not the safest form of investments. Unfortunately, the recent Franklin Templeton case further validates the point.

    Uncertain times require you to re-examine all your investments, even the ones presumed to be the safest. These include your investments in liquid (debt mutual funds) funds.

    A good strategy would be to avoid liquid funds that chase returns and ignore credit risk. Stick to funds that invest in safe and liquid securities. These include your government securities, treasury bills and highly-rated public (PSU) companies. They might offer relatively low returns but are high on safety.

As unsettling as corrections are they are not unusual. Dramatic swings and volatile markets are challenging but they open up a lot of opportunities.

And while you can’t predict or control the markets you certainly can control your response to it.

Historically only sound investment strategies have withstood volatility. Hence the key is to develop one that reflects all your financial goals. Successful investors understand that. And have a strategy that helps them through good times and bad.

But if you still find yourself overwhelmed by the emotional roller coaster of investing, seek out a knowledgeable, trusted advisor to guide you and keep you calm.