Don’t do these things when the equity market is volatile or falling

Equity market volatility is unescapable and unpredictable. Ever since the emergence of the Covid-19, equity markets across the globe including India had seen several instances of sharp sell-offs and solid recovery thereafter

Don’t do these things when the equity market is volatile or falling

Equity market volatility is unescapable and unpredictable. Ever since the emergence of the Covid-19, equity markets across the globe including India had seen several instances of sharp sell-offs and solid recovery thereafter. (See chart below) But the volatility is not the culprit since it always existed. At times it is investors own irrational actions and panic reactions like quick exit, buying at low which leads to more losses in the portfolio.  So, we list down some of these actions that investors should strictly avoid in the volatile or falling market.  

S&P BSE Sensex short term trend is like game of tug of war between bulls and bears

Overall market has shown resilience to positive cues but intermittently market was volatile on virus worries

Avoid doing these things when equity market is volatile or falling

Buying more to average

Predicting market direction is tough and at times the investment calls may not hit the desired target. Typically, as the stock prices start falling sharply below the buying price, investors become overconfident and tend to buy more to average out the cost. But there is no guarantee this will be fruitful. Remember, Abhimanyu - legendary warrior from the ancient Hindu epic Mahabharata who had had the half knowledge about Chakravyuha. He knew how to enter it but didn’t know how to exit or break it. Investors tend to buy more and more without evaluating the underlying strength of the company. The outcome money gets stuck, investors incur more losses on their portfolio. Averaging should be done rationally after doing proper research. Also, a cautious averaging also ensures your exposure to equities is not deviating far from the target asset allocation.

Over diversify into stocks

Diversification refers to spreading investment across stocks to reduce the risk. Over diversification refers to a scenario when the marginal loss of expected return is higher than the marginal benefit of reduced risk. As market falls, investors are tempted to buy more on dips. Ultimately it falls prey to dangers of over diversification namely, lower than expected returns, duplication i.e., buying 2-3 different companies of same sector and larger portfolio makes tracking difficult.

Blindly imitate the portfolio or hold stocks owned by the market gurus

Just like Warren Buffet globally, Indian equity market has seen the dominance of the several market gurus namely Rakesh Jhunjhunwala, Ramesh Damani, Raamdeo Agrawal and many more. Based on the news and recommendations, investors often add stock holding of these veteran investors. While there is no harm in doing so as they are all legends. But no one knows when these market gurus sell their stake and when they do it could be too late for the retail investors who accumulated large number of stocks to earn quick returns.

Too much of margin trading 

“Buy low, sell high” is the common investment strategy when investors buy stocks at lower price and sell at higher price. Now as the market falls many investors may not have the required capital to buy the stocks. Hence, the broker offers the money to purchase the stocks. This refers to margin trading. While margin trading helps to make profit from the short-term price fluctuations in the stock market by paying small initial margin or even leverage the shares in the margin account. In addition, in event of stocks prices falling more it also aid investors to short sell. However, risks are many such as massive losses in event of sharp market volatility and brokers might liquidate the shares to recover the losses. Some brokers do offer option of convert margin trades into delivery but investors should get involved in margin trading only after thorough understanding and not get overboard on it.

Hasty decisions to exit due to panic causes regrets later  

Typically, as market becomes highly volatile investors become fearful and sell winners too early also known as ‘disposition effect’. But volatility could be short term and market rebound sharply later on. Recent example when S&P BSE Sensex fell to lowest level since August 2021 at 55,822 points on December 20, 2021 on Omicron fears. Market have recovered well since then and surged 9% closing 60,617 points on January 11, 2022. If we look at the S&P BSE Sensex trend since December 2019, the table below shows how in 7 out of 10 scenarios the Sensex fell sharply a day prior to registering biggest 1 day % gains (public holidays and weekends are excluded).

Such quick recovery after selling could cause regret among investors. But rather than regretting investors should start planning about their next investment moves as market will always offer opportunities.

Stopping the systematic investment of the equity mutual funds

As equity market trade at higher valuation and intermittently volatile. Stopping of SIP and restarting later is common thought in investors mind. But can anyone of us predict the market direction accurately? The answer is no. SIP was done with purpose of meeting the term goals? Correct then stopping SIP means derailing all such goals. Also note that market timing is pointless and staying out of the market is loss of opportunity. And stop and start may lead to investors putting less money at work and less compounding benefits on investment. SIP investing should be in sync with your goals irrespective of the market movement. Rather than stopping be patient with your SIP and keep investing as long-term investing see lesser impact of the market decline.

Summing up

Hasty or emotional investment decisions could alter the long-term investment strategy of the investor and put them in precarious state. Rather than just blindly investing or chasing returns or getting panic, investors should be informed investor and invest in stocks in line with the risk appetite and stay patient.