I am writing this because I received countless calls during last 15 days with common queries like-
- Should we buy now?
- Is it the right time to average out the position or should we sell our equity portfolio now?
- Is it the bottom or are we nearing the bottom?
Presently the market has corrected itself by about 20-25%. You will have to prepare yourself to see still deeper levels of the market correction, even up to 50%. We are not saying that this is going to happen but there is still a possibility of more panic selling to come, as it is hard to estimate the exact economic impact of the CoVID-19 spread. You really need to understand and accept that risk. If you are finding it difficult to manage the mental turmoil and volatility, it is better to exit now otherwise it will create a lot of discomforts and you will eventually end up selling your equity portfolio at almost the bottom. However, if you are prepared for the worse and are ready to test even deeper levels of market fall, the odds are on your side to get good returns eventually.
Many people experience the shock of their lives when they realize that the market (due to any number of factors) has suddenly taken an opposite turn from its normal trend and has started behaving in a completely recessionary manner. Further, in such scenarios, investors often feel that this particular recession is the greatest and most long-lasting of them all.
Very often, on seeing your portfolio go down so quickly, the situation provokes an instinctive response: ‘let me sell out to avoid more losses’. This in fact results in your paper losses actually turning into real losses. Data examined over the past 50 years shows that if you had sold out your fund during any of the market corrections that occurred in the past five decades, you would have surely missed the amazing wealth-creating opportunity that later unfolded. You can say that “Loss aversion” has a dual impact. Apart from handing you over a definitive actual loss, once you have sold out, you seldom feel confident enough reentering the market later, thus resulting in lost opportunity even in later years.
And to answer the question as to when will we be seeing the bottom of the marker, the most important point to note here is – It doesn’t make any big difference if you buy at the bottom or at higher levels, if you hold on for the long term. Important is to handle your emotions and not just acknowledge the RISK but ACCEPT it as well. Still, however tempting and simplistic this strategy may look like, it is not at all easy to finally come out of such situations as a net winner.