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5 Mistakes people make during a market crash

Here are 5 such mistakes that investors often end up making when faced with a significant market fall.

It’s a volatile time for the world. The Indian economy is trying to make a comeback despite pronouncements to the contrary by multiple rating agencies. This uncertainty and confusion amidst a global pandemic that seems to be becoming a fixture in all our lives, means that the spectre of a significant market fall is rarely far away.

We saw it happen in March-April 2020. We have seen a thousand point falls in the Sensex since then. We understand it can be quite unnerving to face a crash. Seeing a significant percentage of your portfolio suddenly disappearing will hit anybody hard.

But whether we like it or not a market crash is more or less certain in equity markets. Any commodity that is traded will see something of this sort once in a while. But no crash has been permanent so far, but many investors have made the mistake of believing it is. 

Investors do make mistakes no matter how smart they may be otherwise. Even the likes of Einstein and Newton lost money in the stock markets thanks to them not adhering to certain basic tenets of equity investing like not investing in bubbles (if only they knew!). But you don’t have to make the same mistakes.

No matter what the case, during a crash there are some actions one can take and some-one definitely shouldn’t. Here are 5 such mistakes that investors often end up making when faced with a significant market fall.

1. Stopping their investments

The success in long term investing comes from two things. Staying invested in good companies and keeping on investing, especially when markets crash. Market crashes often lead to some really good companies being available on a kind of a discount. 

This means that fund managers get to pick up even more shares of really great companies. As a result, your SIP literally becomes more valuable. This is also when your SIP does what it is meant to, which is help you invest in the most optimal way in varying market conditions.

Stopping your SIPs now is like not buying what you really need when there is a flash sale going on.

Sure, we have seen years of barely inflation matching performance from the indices, but the longer one was invested the more likely they were to see inflation-beating returns. In fact, for a period exceeding 6 years, the chance of a loss was nearly zero.

2. Withdrawing because you fear you will lose your capital

There is much to be said about booking losses. It is a prudential move for traders but for investors who invest in good mutual funds, losses don’t necessarily mean the same thing. For one, if the fund selection is good then chances are your loss is more of a temporary phenomenon. 

Even if the fund is bad, you can always switch into a better fund. But exiting equity altogether? That’s where the real loss can come from. While the future can always surprise us, so far there has never been a permanent equity bear market, at least in India.

Sure, we have seen years of barely inflation matching performance from the indices, but the longer one was invested the more likely they were to see inflation-beating returns. In fact, for a period exceeding 6 years, the chance of a loss was nearly zero.

Exiting to protect your investment is likely to hurt you more than it will help you. 

3. Trying to time the bottom

It’s not without reason that many people call equity investing a gamble. It often does see gambling like behaviour as many enter the markets hoping to turn a quick profit. Some succeed but most fail miserably. Timing the market is the holy grail of traders and the smartest of people have come to realise the futility in it. During a crash, many investors hold off their investments thinking they can get a better deal later.

That’s why there is something called a SIP. You don’t know when a market will bottom out. All you can really do is keep on investing and average out your investment cost. Markets can turn on their heads, literally. 

4. Losing faith in equity

Equity as an asset class is volatile, no doubt about that. However, it is also the one liquid asset class that has consistently beat inflation. A well-thought-through approach to equity can and has rewarded investors for their long-term goals. 

Equity has seen multiple market crashes but has still kept ahead of inflation. Considering the cycle of a crash and recovery can span years, investors can often become despondent. This is also why we keep saying that equity works but only in the long term of 7 years or more.

But the truth is that as long as business and commerce are necessary in this world, equity will remain. Losing faith in this asset class and never investing in it again is a mistake that can adversely affect most of your long-term financial goals. 

If you have invested in well-chosen mutual funds with a history of consistent performance, then you have no reason to lose faith.

5. Running to fixed deposits or other fixed income schemes for all financial needs

Fixed income schemes have their place in a person’s portfolio but unless it is going to beat inflation it is far from ideal for long term goals. Fixed income generally stays below or just about matches inflation for the most part. The dropping fixed deposit interest rates are a testament to the fact. Moving to 100% debt means sacrificing inflation-beating growth completely. Unless you save a significant amount of your earnings, it is far from likely you will save enough for your long-term goals such as retirement.

Final word

Almost no one can predict when a market crash is coming. But how to manage the impact of a crash on your investments is up to you. Staying invested (if you are in good quality stocks or mutual funds) and continuing to invest, is a smarter bet than writing off equity altogether.

 

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