4 tips to help you prepare for the next market crash
Having fallen trap in March 2020, the stock markets have been extremely volatile. They somewhat faced the light of recovery in April 2020 only to plummet again in May and are now back to their April levels.
The recovery lately has taken everyone by surprise. Specialists are questioning this rally and are certain, moreover, that it will not sustain. Covid-19 cases haven’t slowed down in India, April industrial production numbers are lamentable and expected GDP numbers have been downgraded by various rating agencies. Nevertheless, none of these factors has dampened investor spirits. It is safe to inform that economic realities, corporate earnings and the stock markets are all completely out of sync with each other.
A huge amount of uptrend has to do with the liquidity infusion across the globe. The unlocking 1.0 in India has also been a contributor to the rally although there are still questions that are swaying to whether it has any legs to walk on.
Regrettably, every piece of good news comes along with bad one, making it rather strenuous to foretell how long economic recovery will take. Vaccines are yet remotely away but there seems to be several drugs underway. The US is expected to declare more stimulus in the month of July 2020 injecting more liquidity in the system. There is also the risk of a second wave in India which is already active in other countries. In a whole, there is still a lot of unpredictability culminating into continued market volatility. Top investors across the world believe the same and continue the process to remain cautious.
But what should the individual investor do?
When the markets crashed a few months ago (March 2020), there was a good chance that you were absolutely unprepared to deal with such blows to your portfolios. The non-appearance of a financial plan to guide you amid such uncertainty can be very unsettling. So, here we outline some tips to help you prepare for the next market correction:
Keep some cash in hand: It’s a rather notable fact that trying to time them is a futile exercise. None can foresee the downfall of markets. And these uncertain times worsen the situation giving rise to volatility. You can’t invest all your savings now or exit the markets entirely at the risk of missing out on the rally to recovery. So, in such situations, a good strategy is to keep some cash with you and buy stocks at dips.
Continue with your ongoing SIPs. It will average out your buying costs.
Now is apparently not the moment to get adventurous. Avoid fundamentally weak companies: Governments across the world have proclaimed large stimulus packages to nudge demand in their respective countries. This massive liquidity injection has led to the recent rally in the stock markets. Giving lifeline to undeserving companies (stocks) with weak fundamentals. This puts you, the investor, in a dangerous position. As there is an abundance of fundamentally weak stocks trading at high valuations. Try avoiding such companies. Concentrate on buying companies with a strong balance sheet with great potential at fair prices. Companies that will not only do well over the long-term but are strong enough to sail through these uncertain times.
Reduce your exposure to equity: I would, nonetheless, never advocate altering your portfolio’s asset mix (equity vs bonds) as the stock markets move. Only your goals describe your portfolio mix. But in these uncertain scenarios, investors closer to their goals must consider reducing their exposure to stocks, insulate their portfolio from volatility.
Examine your investments in Liquid (bond/debt) Funds: Considering in contrast to popular opinion, liquid funds are not the safest form of investments. The recent Franklin Templeton case, unfortunately, further validates the point.
Uncertain times insists the necessity for you to re-examine all your investments, even the ones presumed to be the safest. These comprise your investments in liquid (debt mutual funds) funds.
A good strategy would be the avoiding of liquid funds that chase returns and also, ignore credit risk. Stick to funds that invest in secure and liquid securities. These encompasses your government securities, treasury bills and highly-rated public (PSU) companies. They might offer relatively low returns but are high on safety.
As unsettling as corrections are they are not unusual. Dramatic swings and volatile markets are challenging but they open up a huge sources of opportunities. And while you can’t foresee or control the markets you certainly can control your response to it.
Historically, only sound investment strategies have withstood volatility. Hence the key is to develop one that reflects all your financial goals. Successful investors comprehend that and, moreover, have a strategy that helps them through good times and bad. But if you still find yourself overwhelmed by the emotional roller coaster of investing, seek out a knowledgeable, trusted advisor to guide you and have you kept calm.