What to do in this crash | Value Research For those who have been threw the earlier market slumps, the right strategy is crystal clear
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What to do in this crash

For those who have been threw the earlier market slumps, the right strategy is crystal clear

Like every other sharp move in the market, whether upwards or negative, that of August 24th brought deep regret from many investors. The reason for their regret is that had they anticipated the crash, they could have pulled out their investments. Then, they could have re-entered their investments at a lower levels, and cleaned up with big profits in the process. However, now that the crash has happened, many of them decide to do the next best thing. They decide that since they'll get out now, and then wait for the market to bottom out and then they will buy again.

When you look at the stock market frequently, its most obvious characteristic is that it goes up and down a lot. Naturally, we feel that the way to make money is to somehow buy whenever it is very low and sell whenever it is about to fall down. Of course, no one can stop you from trying to do so. You are probably tempted by stories about those who have made lots of money by cashing out at the top and then buying their investments back at the bottom. The problem is that this is impossible to do consistently enough to actually make it worthwhile. You always hear these stories from the past, but never of anyone having done so consistently.

This recent crash is a shining example of this. For more than a year, we've been hearing that the party is over and there's something deeply wrong in China and it will drag down the whole world and so on. For all the experts in the world, this talk was cheap. Did you hear anyone saying last Friday that, "Hey it's time to sell today, Monday morning will be the bloodbath". No, everyone started selling when everyone started selling. Nothing new there, it happens in every crash.

What's more, it will happen again when the markets turn upwards again. Again, no one will know till the last moment. Sure there will be some 'experts' and investors who will say the one thing and some the other, but nothing that one can actually act upon.

For all of us who are trying to grow our savings with a focus on the future, the right strategy is actually quite clear. We should choose a handful of equity funds with good long-term track records and keep investing steadily through SIPs. And not to stop doing so during crashes. The whole point of investing steadily in a mutual fund, either through an SIP or otherwise, is to continue doing so in bad times. Time and again, analysts like myself have pointed out how investing in bad times is almost the entire point of investing. Historically, every single market crash has eventually proven to be nothing but a buying opportunity which can easily be made to serve the purpose of boosting one's returns.

The current crash will prove to be a perfect example. In the short run, markets get influenced by global or other extraneous factors. However, in the medium to long run, the only thing that matters is the state of the local economy. The Indian economy is clearly in a steady recovery mode. The indicators are many. Inflation is down and interest rates will follow. Macroeconomic indicators are gaining health, with the current account deficit almost gone and the fiscal deficit in control. We are one of the few emerging market economies that actually benefit sharply from the fall in the commodity prices that is accompanying the crash. Today, we have one the best growth trajectories in the world.

In the medium-term, this is what will decide the direction of our stock markets. You might hear a lot of discussions about whether this crash is a buying opportunity or not. The answer is that in a growing economy, it is always a buying opportunity. A steady, systematic investment strategy was the right one a decade ago, a year ago, and a week ago, and so it is today, and so it will remain for the foreseeable future.


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