5 Most Asked Questions About a Market Crash
Markets have been erratic since March and this has left many investors with questions regarding the state of their investments
The COVID-19 pandemic has affected economies across the world. While India took early steps to ensure that it keeps a tight leash on its spread, the government announced several stimulus packages to help industries and companies survive this period. However, markets have been erratic since March and this has left many investors with questions regarding the state of their investments. Let us look at the top 5 most frequently asked questions that investors have asked us and our response.
Why did the market crash? When will it recover?
Since late December 2019, a new strain of the coronavirus started infecting people in China, and soon, it had started spreading globally and infecting people at a rapid speed. With social distancing seeming like the only way to stop the spread, many countries including India decided to lock down all public activities (such as schools, offices, public transport, etc.) in March. Almost all industries were impacted and markets started plunging to record lows.
Predicting the recovery of the markets can be tricky since we have not dealt with a pandemic of this magnitude for decades. However, looking back at all historic market crashes, this can be a good time for investors to consider creating a long-term equity portfolio as markets can be expected to recover and rebound strongly over the next 5-7 years.
Did I choose the wrong stocks? Why has my portfolio incurred losses?
This is probably the most common question. Investors must realize that the current market crash brought the marquee indices down by around 30 per cent. When an index falls, more than 95 per cent of stocks become vulnerable to panic selling and nosedives in price. While it is good to critically analyze the investment decisions, the choice of stocks is not the reason behind any portfolio losses. Having said that, investors with a diversified portfolio would be in a better position to recover their losses than those with a skewed view towards say, small-caps, or sectors that were the worst-affected such as aviation, hospitality, etc. The bottom line is that unless the investor sells, these are notional losses that can be recovered once the markets start rebounding. Investors must avoid panic selling and create a new strategy to minimize their losses right now.
Should I buy stocks since the markets are low?
This can be a good time to invest, provided investors ensure that they look for fundamentally strong companies to invest in. Just because the prices are low, they should avoid bottom-fishing. If you want to invest in stocks, ensure that you conduct a thorough fundamental analysis of the company and invest in the ones that have the foundation to weather this storm.
Another option is to consider staggering your investments in stocks of good companies or look for SIPs of diversified equity mutual funds. This can help them benefit even if this situation persists for longer than expected.
Should I stop my SIP or redeem my funds?
Equity as an asset class can be volatile in the short term but can create wealth in the long-term irrespective of market cycles. Continuing SIPs especially if you have a longer horizon in mind is a good strategy, here’s why—SIPs help you benefit during any volatility as you buy more units when prices are low and less when the prices are high. If you start now by investing during dips, you will end up accumulating more units in the long run. Decisions like redeeming mutual funds should be based on capital requirements and if your investments have been underperforming consistently over a sustained period, and not on short-term volatility as markets recover over time.
What is the biggest mistake to avoid during a market crash?
The biggest mistake that most investors make is panic selling. As the markets nosedive, many investors start selling in an attempt to curb their losses. However, this turns a notional loss into a book loss, making recovery difficult. Investors should consider sticking with their original investment plan with small tweaks and keep a long-term horizon.
Equity investors must always be ready for sudden market volatility. While a market crash might seem catastrophic, they have always bounced back stronger and higher than before the crash. Hence, investors must avoid any emotion-based investment decisions and stick with their investment plans.