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Stock Market Crash! Why asset allocation, diversification is important while investing

Sunil Dhawan
Coronavirus, covid 19 news, stock market why down, stock market when will it recover, retail investors, equity, asset allocation, diversification, portfolio re-balancing

Investors, especially those who have been saving regularly over the past 1, 3, 5-10 years are finding their fund value in red. The stock indices such as the Sensex and the Nifty 50 are down by nearly 30 per cent over the last 1 year. The mutual fund SIP investors are in a state of shock and are looking for answers as to what needs to be done now. Investors are asking why the stock market is down and when will it recover? Should one stop one’s SIP or rather increase allocation? The answers to these may not be as straight forward as it looks. The market meltdown would have impacted most investors, but those who have their asset allocation in place and have a well-diversified portfolio across asset classes, the damage could have been less.

Here’s is what Jashan Arora, Director, Master Capital Services, has to say to the investors in the current market situation.

The COVID-19 novel Coronavirus pandemic has rocked the stock market, with the global stock market down from their highs, and many individual stocks performing much worse than that. Stock markets witnessed a bloodbath with Sensex and Nifty going down to multi-month lows. In just weeks, the Coronavirus pandemic has cleaned nearly a third of the global market cap. The Indian equity market has entered the bear market territory, with more than 20 per cent cut in benchmark indices.

Equity Mutual fund Investors received a negative return of about 25 per cent in the Equity Oriented mutual Fund schemes as the broader market witnessed significant downtrend amid coronavirus triggered the recession fears, But this is the time wherein products like SIPs work, while no one can ever time the markets,  it is always good to average out your buying NAVs via the SIP route.

Over the past few weeks, the fear of Coronavirus has sent the markets tumbling. The spread of the virus has shaken the confidence of investors and triggered panic across the world.

Although the Coronavirus is new for us, the turbulence in the stock market is not. It's important to remember that this is not the first - and won't be the last. Many people have lived through several at this point but it doesn't make any of them less scary. No two stock market crashes are alike but they all have one thing in common–the market recovers eventually. The downturn continues in the near term but the markets will recover over the next few months.
As the stock market is cyclical in nature there will always be turbulence in it. No one can make predictions when or how long a recovery will take. It could be weeks, months, years or it could fall even further. But, history has taught us that the market recovers and so do we.

However, in the midst of the stock market turbulence investors who measure their returns in long terms such as in decades, not months or even years could have some excellent opportunities. By staying invested for the long-term, you're more likely to improve your returns over time. Taking a long-term view is the most important thing, whatever you decide to do. There have been market crashes throughout history but over time the market has recovered though.

There are lots of stocks that an investor wanted to buy but did not do considering the high valuations. We are advising investors as most of the stocks are available at multi-year lows that what they were only a few days ago. Now the valuations of the stocks are looking good as compared to what they have been in a long time. The stocks are much less expensive, the investors who want to invest in the market now can select the stocks based on their valuations and fundamental analysis on the basis of their past performance and various ratios of the company. At this market level another factor which we can consider is the correction in the levels of the stocks.

If you have money, it is an excellent opportunity to start accumulating, invest some of it and wait for the markets to move from here. These opportunities are available in the market once in a while. Someone who is trying to build his portfolio or a long-term investor can get into the market now. If anything, the low prices usually mean it's a more favorable time to buy. But that does not mean you should get obsessed with trying to time the market. But the worst thing a typical investor often can do is sell.

Of course it is not sure if stocks will go up or down from here. But eventually, over a long period horizon, the market almost always goes up. If you can get it when it's low, that's good.

Despite the recent volatility being quite extreme, market volatility is something that investors should be prepared for. Volatility means that the markets will sometimes go down, but they often bounce back. New investors can start by investing small amount and ensure that they are diversified across major asset classes (equities, bonds, cash and gold) and major regions/sectors. Having a balanced portfolio and staying the course during periods of uncertainty may help you in the long run.

Know your tolerance for risk and then build your investment portfolio with that in mind. But remember that meeting your investment goals sometimes means taking on some risk and taking risk means there will be volatility in investment returns. That's why if you are comfortable investing in the stock market, make sure your investment portfolio matches your risk attitude.

If you found recent volatility too much to bear, you should consider diversifying into other asset classes that are less volatile or tend to perform differently to the stock market over time. Investing in things that perform differently in different market conditions means not everything in your portfolio will do well at the same time, but could provide more balance to your returns.

Market fluctuations can cause even the most experienced investor to panic. But it’s important to focus on your long-term investment goals and stick to a disciplined plan to avoid making moves that may come from an emotional reaction to drops in the market.