Carnage on D-Street! Top 10 mistakes you must avoid in a falling market

Experts feel that investors should avoid timing the market as it is very tough to predict a bottom or top. Stay with fundamentally sound companies which have always braved the fall.

   

The S&P BSE Sensex on October 5 plunged nearly 800 points while the Nifty50 dropped by 282 points to record its largest one-day fall since August 2015. For the week, the Sensex lost 5 percent and the Nifty 5.6 percent.

Investors lost nearly Rs 4 lakh crore in terms of market capitalisation on BSE, taking the total weekly loss to over Rs 8 lakh crore.

When carnage of this magnitude takes place, it is not the money investors lose, it is the confidence that's shaken. A similar incident happened in 2008 when almost 30-40 percent of index value was wiped out in a matter of days.

Retail investors took nearly 5-6 years to re-enter equity markets via mutual fund route and we are already seeing signs of redemption starting from mutual funds which will further exert pressure on markets.

According to data from CAMS, a mutual fund registrar which covers 85 percent of the industry flows, cash plans or liquid funds saw outflows worth a whopping Rs 69,694 crore.

What should investors do? Well, experts feel that investors should avoid timing the market as it is very tough to predict a bottom or top. Stay with fundamentally sound companies which have always braved the fall.

There are multiple parameters which investors can use to select the stock, but in a falling market examining a fundamental of the company is key tools or first layer of the screener. “This fundamental can be linked to revenue trend, growth in profit margin, the attractiveness of return-on-equity and finally valuation.

Given a gravity of fall in the recent period, it is likely to propel investors to take ill-advised moves which can hurt the overall financial plan.

We have also collated a list of 10 mistakes which investors’ should avoid in a falling market.

Avoid withdrawing money

A common mistake most investors do in a falling market is exiting from ongoing investment which is meant for long-term. During a course of the investment cycle, there will be multiple drops in price due to any reasons.

This drop shouldn’t prompt investors to withdraw money as long as the fundamentals of the underlying asset are strong. Further, investors should continue with ongoing SIP in mutual funds.

The market will recover in long-term irrespective of the fall which is also evident from a case of 2008 financial-crisis which fell over 52 percent but gradually it recovered on a long-term basis.

Avoid buying more to average

Most likely investors tend to fall prey for falling knife in its effort to average the cost in falling market regime. Although there is merit in averaging the cost, it should be done on the basis of only fundamental soundness. Otherwise, it is likely to see a further drop in price if it’s backed by deteriorating fundamental.

Avoid value hunt

It is a general tendency among investors to buy the stock at discount, and especially during the falling market, they tend to go hunt for a value stock. Though this is a good bargain, it requires a series of analysis and studies. Making a random handpick just because a stock corrected could turn into value-trap.

Avoid altering long-term strategy

It is usually during falling market when investors try to change their investment strategy due to short-term events like falling market. This undermines the long-term strategy which will slow down the pace to achieve the financial objective.

The effective way to tackle this short-term event by building a proper asset-allocation which is sustainable in long-run.

Avoid using emergency

In order to fuel the portfolio and capitalize from the falling market, they tend to take leverage position by using emergency corpus. However, if decision reverse it will have a serious implication on financial position.

Trying to invest into favourites at one go

It is always prudent to invest in a staggered manner rather than arguing with the prices about how low is too low.

Getting caught in ownership bias

Fall in the market requires one round of introspection along with a fresh listing of potential winners and losers due to shift in the regime.

Past winning sectors may not be the best way to go. Choose better stocks of today than better stocks of yesterday. Respect the sector rotation.

Tying to catch a falling knife:

Single day falls in excess of 10-15 percent attracts a lot of investor attention. One drastic fall must be discounting some crucial information. Till the time we make peace with the new development, do not get in just cause the prices have come off.

Converting Trading into Investment:

A common mistake is to hold on to a trading position. The stock intended to be booked with 3-5 percent profit is held with a rationale of strong fundamentals when starts falling even beyond 3-5 percent.

This disconnect in the objective of deployment is an error along with the fact that the very fall might cause deterioration in fundamentals.

Exit trades with Stop Loss. Study the stock before investing.

Lack of Active Realignment:

Investors should be active in the day-to-day business of the market but a process of realignment is definitely prudent practice. Keep a track of portfolio beta and adjust it to a low beta or high beta by simply shifting weights as and when situation warrants.

Prudence is in reducing portfolio beta in the falling market and raising portfolio beta after a rising course resumes.

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