Markets continue to perform poorly as we enter the second half of 2022. The pandemic unquestionably dictated the dynamics of stock markets in the last two years. It all started with heightened uncertainty in the business environment after the formal declaration of the pandemic by the WHO.
As a result, most stock market indices declined precipitously from February 2020 to mid-March 2020. To deal with the panic, governments and central banks worldwide responded with unprecedented fiscal and monetary policy, including interest rate cuts and market liquidity infusion.
Flushed with liquidity and fewer avenues to spend discretionary funds due to closures of shopping, travel, and tourism, households piled money into equity markets. This led to a reversal in stock markets and surpassed all previous peaks. As a result, the Nifty 50 index approximately doubled from mid-March 2020 to the end of 2021.
Now, the flagship index has dramatically declined from its October 2021 peak of 18,604. The magnitude of this drop can be judged by the fact that the latest fall in the index of 18% has pushed the markets into bear territory.
This 2022 decline in stock prices can be attributed to the RBI's reversal of easy-money policies, the Russia-Ukraine war, ongoing supply chain disruptions, China's zero-Covid policy, oil price increases, and raging inflation, and a fear of recession in the US.
When investing in the stock market, you have to be mentally prepared that it will have a bull and bear run alternatively. Of course, a market correction is difficult to predict, but being prepared for the worst should be a life and an investment habit.
During market corrections, selling off your investments might seem like a good idea. However, negative news such as a pandemic, an asset bubble that's about to burst, revelation of scams, etc., will influence any investor.
However, historical data shows that the best and worst-performing days of the stock market are often quite close to one another. This is the crucial reason why the strategy of timing the market does not work well for most regular investors.
The critical thing to remember is that fear leads to panic, especially among amateur investors. This panic often makes investor sell their investments at low prices during a stock market crash.
But historically, markets have always recovered from a crash, and instead of selling in a panic, you should stay calm and hold your investments and SIPs to continue. If you manage to continue investing irrespective of market conditions, you will reap the rewards when the markets recover at a later date.
Similar to making panic sales during a market crash, it is also vital that you do not cause panic buys during a market crash. Panic buying can be described as a state of mind that pushes you to make investments indiscriminately, which can become an obstacle to reaching your current investment goals.
Averaging down on your losers is another mistake that most retail investors make. They believe that the stock was good at ₹100, it is even better at ₹50, and anything below ₹30 is a steal. However, one must also look at why the stock is becoming cheaper; make an informed decision after looking at the parameters.
Following an asset allocation strategy is an excellent way of minimising the risk and getting better risk-adjusted returns over time. Rebalancing involves buying and selling investments periodically so that the weight of each asset class is maintained as per your targeted allocation.
When done right, rebalancing your portfolio will help you stay on course to reach your financial goals and help manage overall portfolio risk when volatile markets. That said, it might not be a good idea to rebalance your portfolio in the middle of a stock market crash. It would help if you instead considered letting markets settle down a bit before rebalancing your investment portfolio.
A stock market crash offers investors a unique opportunity to grow their wealth. But to take advantage of this crash, you must have a plan in place when the crash happens. The above strategies are designed to help weather a market crash and ensure you can grow your wealth significantly when markets recover later.
Asset allocation is the distribution of your capital into various financial instruments like equity and equity-linked instruments, precious metals, debt instruments, etc. It purely depends on your risk appetite and financial goals.
Stocks are considered cheap based on their price-to-earnings ratio (P/E). However, all cheap stocks are not good bets. One must do their own research before investing.