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Stock market madness: How to stay away from it?

·5-min read

In the game of investing in the stock markets, trying to time every up and down or making sense of every lunatic movements on a daily, weekly or monthly basis is practically impossible. Also, it is a futile attempt for an investor. There are two reasons for the same.

Number 1: In the short term, markets are driven by momentum. But in the long term, they are driven by the fundamentals of an economy and corporate earnings. At the start of the year, Nifty was trading at 12,182.50. However, it has now plunged to 11,236, over the exacerbated fear of the global spread of novel coronavirus. This is a fall of more than 7% from the start of the calendar year.

Many experts have been cautioning about the impact of the outbreak of coronavirus on the global markets. Until a few days ago, many were of the view that coronavirus is going to have a minimal impact on the worldwide economy.

However, with new cases getting reported, it has spooked the investors in the stock market. Let’s take a look at how the markets reacted during crisis each time:

As seen in the above table, this is not the first time that the Indian indices have been reeling under the pressure of global fear. This has happened in 2000, 2002, 2008, and 2016. Each time the Indian markets got the punch, they not just recovered, but also bounced back again. So instead of timing the markets, take a long term view.

Number 2: No one knows what will happen next. With the fear of coronavirus becoming a pandemic, it would be a good time to recall Nassim Nicholas Taleb’s idea of Black Swans. Everyone is busy forecasting EPS growth or GDP number.

And, when everything looked glory for the Indian markets, no one could imagine that an event that happened around 65-75 days back would take the entire world by storm. That is a black swan, an event that is beyond imagination, and can never be predicted.

So, irrespective of how much you do number crunching or valuations and come with a precise number of where the Nifty will go, such black swan events can make your calculations go for a toss. So as an investor in the stock market, what should you do when markets swung wildly, and there is a bombardment of news?

Here are 5 ways to avoid the stock market madness.

1. Don’t take every news as bonafide

Everyone is getting affected differently. There would be news and rumours all over, especially when it comes to the ‘Black Swan’. Stay away from the news channel during such times. Instead, Research & Ranking recommends you to stay on the course and stick to your goals and financial plan.

This doesn’t mean you are not aware of the relevant news to your portfolio, it merely means staying away from the noise and focusing on the fundamental strength of the businesses you’re holding.

2. Invest according to your goals

If you need money for an emergency or for goals less than 1 year, then you may want to consider investing in safer asset classes than equities. But if you’re going to only invest in FDs, gold and real estate, then even a decade from here won’t make your money grow significantly.

As you can see above, if you would have invested Rs 1 lakh in gold, after 10 years, it would have turned into Rs 2.1 lakh, while the amount invested in Nifty, would have become Rs 3.7 lakh.

But aren’t equities risky as well? Yes, it is. However, the best thing you can do to sail smoothly during the stock market madness is to invest your money periodically, a strategy which is called as rupee cost averaging by the experts.

This strategy helps you to minimize the risks as well as stay disciplined in your wealth creation journey. Always remember, temporary fear in the stock market should not deter you from creating permanent wealth.

3. Keep emotions out of the equation: Markets are moody, that’s true! But unfortunately, they do not care about your mood or how you feel. This means you should not necessarily buy because you feel great when the markets are going up, and similarly, not necessarily sell, because you are in jitters when the markets are going down.

So what should you do?

Don’t make impulsive decisions based on rumours, emotions or even your intuitions. Conduct research even when the markets are going up or going down. The buy or sell decision should be based on data and empirical evidence, and nothing else.

4. Maintain optimal diversification: For many investors, the investment options are restricted to debt, equities, PPF, FDs, NPS, gold, real estate and F&O’s. As mentioned earlier as well, allocate your investment amount between these assets classes based on your goals and risk appetite.

For longer term goals such as retirement, buying a dream house or planning child’s education, one can consider investing in high-quality businesses in a staggered approach. When investing in equities, Research & Ranking recommends you to identify 15-18 quality businesses and decide stock allocation that meets your risk appetite and goals.

5. Understand not all years are same: If you put your money into equities, remember one thing: There would be phases of subdued returns, negative returns and mind-boggling returns.

Now take this case, from 1st April 2014 to 31st March, Nifty has delivered approx. 73% returns over these 5 years, which is a CAGR of almost 12%.

However, if you take a closer look at each of these years, you will realize that not all years delivered the same returns.

What I have been trying to say is, if you’re putting your money in volatile asset class such as equities, you need to have patience plus strong stomach when there is a carnage in the stock markets.

To cut the long story short, the rule of investing during the stock market madness remains the same. Continue investing for your goals during both good and bad times.

Source: Research & Ranking