For those who have invested in the stock market in recent times, the unfolding stock market correction can be unnerving. When investors see a sea of red in their portfolios, it exacerbates the fear factor almost creating a panic-like anxiety.
And you begin to wonder: what if the stock market’s were to slide further? How much money will I lose? Will the market recover? Should I book losses or should I hold? Is it a time to buy the dips?
If you look at the bellwether Sensex, it seems to have tumbled a mere 2.1 percent from its 52-week high hit just last week. But that seems like an understatement if you compare it to the losses many stocks have made in the markets. Frontline stocks have corrected 5-10 percent. For any newbie that’s a big correction.
SCREEN YOUR PORTFOLIO
One of the things you must do first is to evaluate where your portfolio stands in the current situation. Do you have more small stocks? Or is your portfolio in large-caps? Or is your portfolio value- or growth-oriented? In this market, a thorough evaluation of the portfolio is a must.
Just as a rising tide lifts all boats, a falling tide tends to pull down all boats. Chances are that your stocks will tend to dip lower and depending on where they are placed in the market stocks could see a mild to a larger correction.
Usually, stocks in the small-cap space tend to exhibit more volatility. It drives anxiety, and more often than not, investors tend to pull out from these stocks further driving them lower.
If you have too much of lowly stocks or are in too expensive stocks, you should switch to more stable large caps.
KNOW YOUR LIMITS
Just like a great driver always knows when to put brakes and drive slowly on a pot-holed path, a great investor always knows when it is time to scale back, pull back or even limit your losses. In the stock market, nothing is certain. The surest of all expectations can backfire. Hence, traders and investors keep what is known as a ‘stop loss’ in their portfolios, which is nothing but knowing the quantum of losses you can stomach.
Most experts say that an ‘eight’ percent a stop loss is more than enough for a long-term investor. But you could tailor it to your portfolio.
If you have a stable portfolio with large-cap, high-quality names, a higher stop loss could be better, of say 12 percent. Use your personal discretion here. Don’t pull out of the market at every sign of a correction.
TO CATCH THE FALLING KNIFE
You can’t sink in good money after bad if there’s a major shift in market perception. Keep in mind that the value of the stock goes beyond price. It’s also about perception in the market. When you want to invest, several factors are more important, and the price of a stock should only be a small part of that decision. Take a holistic view of the overall market sentiment.
Right now, the market is more shaken than steady.
A good investor deploys more money when the markets are in a high panic mode. Investors are nervy now than before. Stocks tend to correct more sharply at higher levels. So if you are considering entering back into the markets and picking the falling knife, bide your time.
