Equity Investor? Don’t Follow The Herd!

Even when it comes to the stock market, everyone is looking at what others are doing. Investors fail to understand that the herd might actually be clueless. So, here’s help. 

Equity Investor? Don’t Follow The Herd!

No, this has nothing to do with the book by M. Davey. This post is all about a bunch of people who decide to follow the crowd whenever the stock market crashes. So, what exactly happens when the markets are on a downtrend (read bear market)? When the stock markets seem to slide (like now), there are two strategies that investors follow. Either they buy stocks/funds or sell them! Why? When there is a market crash and stock prices slide, so do the Net Asset Values (NAV) of Mutual Funds. People either panic as their returns get hit or they decide to buy more since the prices come down. What should you do?

Stop looking at others and start looking at your portfolio. Your actions should result in better performance for your investments rather than it being a knee-jerk reaction to where the market seems to be headed. Here are some reasons why both buying and selling might be wrong. Let’s tackle selling first.

Selling when the market crashes can lower your returns in the long run and, for all you know, that stock or fund might do well after you sell it. Let’s take an example. Suppose you held the shares of TTK Healthcare and you decided to sell them at the start of February because the markets were crashing and everyone seemed to be selling. TTK healthcare was at Rs. 826 per share then. And now? The share is at Rs. 1320. You missed a gain of close to Rs. 500 per share! That’s why selling blindly might be the wrong thing to do. In this scenario, buying seems to be the right option. However, you must understand that there is no guarantee of this stock not falling in the future. So, what is the best course of action?

Additional Reading: 5 Tax-Efficient Portfolio Tips for High-Income Earners

First things first: look at your portfolio. Understand why you invested in those stocks or funds. They must be for the long-term and should be linked to one of your goals like your child’s education or your retirement. If you think the stock/fund’s fundamentals haven’t changed, the financials are still good and no negative news on the company/no change of fund manager, then, you could invest more in that stock/fund on a regular basis; maybe whenever the prices come down. Don’t invest a lump sum during market downturns (you don’t know what kind of downfall we are looking at in the short term).

Continue your Systematic Investment Plan (SIP) in Mutual Funds. People talking about stopping their SIP is a bit absurd. The whole point of SIP is averaging out those costs. So, when the markets fall and you invest at lower prices and get more units of that fund, isn’t that a good thing? If you stop investing at market lows, you will be buying at high prices and your returns will fall. If possible, do a SIP for stocks too. This will help you handle those volatile phases in a better fashion.

Additional Reading: A 4 Step Approach To Building A Profitable Investment Portfolio

At the end of the day, nobody can time the market. Generally, people choose a method depending on the time they have to invest (i.e. time available to reach that goal) and whether they want to maximise returns or minimise risks. The best method might be combining the two strategies. Maximise your returns by continuing to invest during market downturns, and minimise your risks by not putting in a lump sum.

But this will work only if you have chosen good stocks or funds. How to do that? Take the help of a financial expert. It pays, literally!

This article was originally published on LinkedIn.

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Category: BankBazaar Equity investing ExpertSpeak

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Sugar and spice and everything nice, Rati certainly imbibed some rich qualities from Toblerone in Brazil and Milka in the US while managing the launch and go-to market operations of many of Kraft Food's brands in export markets across the world while working for Kraft in the US and Taiwan. She continues to spread the goodness, raising the bar high for awesome customer experience on BankBazaar.com with astounding outside-the-box ideas for creating beautiful new products, features and applications and ensuring that the end results are perfect, dummy proof and can only lead to one thing: pure customer delight.

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