Disclaimer: Never buy or sell stocks on someone’s recommendation. If they knew about the market in advance, then they should have been a millionaire by now, but the reality is they are just selling tips. I hope you got me. Let’s start the topic.
As it is always said, “Market values news more than facts”. There is always a scope of correction in the market usually if you look at the past trends there is almost at least 20% correction when there is any stock Market crash. And the worst we could expect is a 30% correction. In the rare case scenario such as recession, the market crashes more than 50%, which is the worst correction of all times, as we have seen during the 2008 sub-prime crisis.
Below are some of the rules you need to follow when the market crashes.
Rule 1: Hedging your portfolio using derivatives.
One can use futures and options to protect their portfolio from any short-term losses due to price swing and high volatility in the market.
Derivatives are one of the efficient ways to hedge your portfolio during the market downturn. I would like to guide everyone who is not aware of derivatives that they should never trade them unless they have sufficient knowledge about it. Derivatives being a broad topic, hence I have dedicated a separate post for covering it: A Complete Guide on Financial Derivatives (Do check them out if you are not aware of it, especially those people who buy futures and options just out of panic of losing their money.)
Trading derivatives without knowing the pros and cons of it might result in becoming one of your biggest mistakes, as it is always said “Half knowledge is more dangerous” We all have seen people making tons of losses and later quitting the market by saying “Stock Market is a gamble.”
No one can blame them as they are not financially literate and neither they have tried to understand the stock market due to lack of time and that’s the sole reason, I have created this blog with the aim of “Spreading Financial Literacy.”
Derivatives were introduced with the aim of hedging risk and protecting portfolios, but nowadays it is mostly used for trading purposes. Big investors use derivatives to reduce their risk while retail investors use them for betting.
Rule 2: You should never panic; emotions could be your worst enemy in the market.
Let’s understand this with the help of an example, everyone would have heard about “Bajaj Finance”, one of the premium NBFC stock, let’s look at some past statistics of these stock, Bajaj finance was trading at around Rs.50 in Jan 2008, immediately before an unfortunate 2008 sub-prime crisis, the stock crashed and found its bottom at six rupees by the end of December 2008. (This downturn was heavily driven by fear in the market, people have started selling their stake, out of panic.)
No doubt the stock was fundamentally strong and within the next one year it started taking a boost and kept on increasing. In Jan 2020, Bajaj finance was trading at around whopping Rs.4800 which is almost 800x times more than the price in 2008.
Isn’t this amazing?
The Stock market is all about emotions if you panic you will lose your wealth. And that’s the reason you should always pick quality stocks, so that no matter what the market condition is you are always in a winning position (If you want to know how to choose a stock then you should better read this post Stock Market for beginners)
Warren Buffet, one of the renowned multi-billionaire investor and CEO of Berkshire Hathaway, has referred market crash as “Once in a lifetime opportunity for investors”
Rule 3: Patience, patience, and patience.
Mr. Peter Lynch one of the mentors of Warren Buffet has stated in one of his books, “The big money is not in buying and selling but in waiting.”
A good investor always looks for an opportunity and does not dive into the market and start purchasing or selling the stock at whatever price it is trading. He should set a long-term target, and keep patience. The market will fulfil his expectations, not immediately but definitely.
If you are willing to buy a stock at a pre-decided target price than you Long term target price has some restrictions, we have discussed it in our next point.
Rule 4: Prepare a strategy for investing in the bear market.
Don’t just maintain a watchlist, keep updating it because an investor should take decision based on current factors. He should keep a check on his target along with other factors and if there is any positive or negative news than he should factor it in his target price as one cannot expect to get the stock at a year old target price and, if you keep waiting for a specific price then you might miss the opportunity.
Update your watchlist by analysing the current market and find out good quality stocks that might be a good choice at the current price level. Never set back when the market falls, take it as an opportunity which is very rare in the stock market.
If you’re holding any penny stocks (Stocks having poor fundamentals and it’s growing because of some unknown reason, remember these stocks are having the highest probability that they might even get delist or can go bankrupt in such a market crash because of the poor company structure), and if you feel these stocks are falling then it’s better to get out of it as soon as possible because they might give you some unwanted losses in your portfolio.
Always be prepared with some handful of stocks by doing proper fundamental analysis and looking at their past trends get a basic understanding and be ready with some funds so you do not lose any opportunities.
“Bear market can make you money at such a speed that no other market can make.”
: Warren Buffet
Rule 5: Exit poor performing stocks.
Find out the stocks in your portfolio that are underperforming or are not increasing at a good rate or they have slow growth over the past few years then in such a downfall, these stock might take a huge hit and will again take more years to get back to the current level so it’s better to get your cash out and invest in something more worthy.
Even if you are facing losses in the stocks don’t try to average it book your losses and get out with your cash.
Some Bonus Tips: –
1) Study past crashes: Read and analyse all previous market crashes and look at how and when they bottomed and started recovering?…. What was the duration?…. How much correction was made?
2) Invest in small portions: For example, if you have Rs.10,000 then invest 2000 2000 2000 2000 2000 at five different price point so that you do not miss out an opportunity. These will help you in increasing profits and reducing losses.
3) Always maintain some reserves, so that you don’t miss out such opportunities because a market crash can you give you good quality stocks at half of their price
If you found my article useful then do comment your views, and share it with all your family and friends. Let’s spread financial literacy together.
Thanks for reading.
Tags: How to make money in a bear market?