Mistakes to avoid during current market correction

The global markets are on shaky ground, thanks to Russia’s war against Ukraine. Multiple headwinds such as valuation worries, Covid-led disruptions, US Fed rate hike, squeezing of liquidity, inflation due to commodity prices, and unrelenting selling by foreigners had put domestic markets in a spot of bother. The Russia-Ukraine conflict just added more fuel to the fire.

Amid all this, what is heartening to see is the behaviour of domestic investors (both institutional and retail). In a break from the past, domestic ‘atmanirbhar’ investors this time have extended their unflinching support over the last few months. Though many believe the correction has provided a good opportunity to add positions, investors should keep in mind the following rules as they grapple with negative sentiments.

Don’t stop SIP in MFs

Often, a falling market scares some investors and forces them to stop regular investments such as systematic investment plans in mutual funds. Stopping MF SIPs is a bad idea, especially in a bearish market. No investor can time the market perfectly (buying at the bottom and selling at the top). This is why a SIP in bad times will, in fact, will work better as cost-averaging comes into play.

However, one the of the common mistakes investors commit in bearish phases is overdoing cost averaging in individual stocks – buying a stock at every dip on the belief that the average cost of acquisition would be lower, and once the stock recovers that would enhance their return. Some buy stocks at a near 52-week lows, thinking of them as ‘value picks’.

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The old market adage of “don’t catch a falling knife” still holds true and often they buy a stock when its in triple digits, average in double digits and exit in single digit! There are several erstwhile popular shares, which fell during previous bearish phases, and till date have never recovered, in the process of becoming penny stocks.

Leverage trading is risky

Another major folly investors commit is taking on leverage. Bullish investors make investments using borrowed money either from financial institutions or other individuals. This is a high-risk strategy, as most of the times, investors end up servicing the interest component of loans rather than making money from the fallen stocks. The bet on bounce back never works well on borrowed funds. Often, investing using borrowed money causes high stress too, even if the investor actually makes money.

Some investors diversify across asset classes and sectors to minimise the downside risk from equities. Though this strategy may sidestep investors from a deep correction in stocks, remember it will also affect their return when the market recovers later. Such investors cannot capitalise on an eventual equities rallies because of over-diversification, and a smaller allocation to the equity asset class.

Some investors also believe in betting big on stocks that they think can withstand bearish market conditions. They think of the resilience of a particular stock as a qualitative strength. There could be various reasons for stock to remain firm such as company/sector specific event or operator-driven movements. These stocks will either be stuck in a range or take a clear direction once the market absorbs the event. So, when the broader rally happens post correction, these may not participate.

What is long term?

Real investors should be long-term with equities because they are playing on the economic value of a business. Sadly, the definition of short-term, medium-term and long-term changes according to the market condition. In a bull cycle, holding even for a year is considered as a long-term, as stocks achieve the expected target price in short periods.

However, during the bear phase, any tenure over three years is considered being long-term. However, the real meaning of long-term is holding for at least 10 years. Investors having the patience to wait for such a long time can reap the whole benefit of the company’s or sector’s growth.