What to do When the Stock Market Falls

Just as Indian investors began expected some positive momentum in the stock market, the bears have returned.

The Nifty is down to 25,000.

It's not a big correction by any means but the short term sentiment is weak... and investors are clearly worried about their portfolios.

Nifty - 3 Months

So, how should you go about investing in the market now?

Read on...

How to Invest in the Stock Market Now

First of all, long term investors in the stock market should not be too concerned unless they need funds in the near term. This is especially true if the stocks in their portfolios are of high quality.

Investors who have a shorter term outlook like 1-2 years, might be concerned due to the recent correction. These investors might have suffered losses in some stocks that could be harmful to the overall health of their portfolio.

Thus, the best course of action at the moment is to exercise caution. We strongly believe that speculation should be kept separate from investing.

Investors should examine their portfolios and weed out any junk stocks, i.e., stocks of companies with poor fundamentals, low growth, loss-making, high debt, low return ratios, etc.

Also at risk are stocks in your portfolio with poor/average fundamentals purchased at high valuations i.e., at high PE / PB ratios. Identify these stocks. Seriously consider either selling them if the company is not delivering on its promises.

Then there are cases where corporate governance is a concern. These stocks will be hammered in any correction or bear market. It's very bad idea to hold them in your portfolio as serious investments.

Also, keep in mind that companies pedalling narratives about 'future growth' but have weak fundamentals, will be hammered badly in a serious correction. The market just doesn't have the patience in such cases. Beware of these stocks.

Do your due diligence. Consider factors such as valuation, industry trends, corporate governance, and market risks before making any investment decisions.

If you are concerned about the stocks in your portfolio, ask the following questions...

• Are the company's fundamentals weak?
• Has there been any recent negative changes in the company's fundamentals?
• Did the PE ratio shoot up without an improvement in the company's earnings?
• Did you make a mistake in your original analysis at the time of buying?

These are all good reasons to sell or at least reduce your holdings. But as is the case with any stock, you must allocate sufficient time for due diligence.

If the answers to the questions above is a clear 'NO', then you can consider holding on, if the stock's valuations are not expensive.

If the fundamentally strong stocks on your watchlist become available at reasonable prices, i.e., a low valuations, then you can consider them.

The best stocks to invest in right now - as long as their long-term fundamentals are strong - are the ones that have fallen due to short-term, sentimental reasons.

Conclusion

We at Equitymaster, have been in the stock market for over 30 years and there is one thing we know for certain...

No one can predict the future and more importantly, no one should attempt to do so. We strongly believe that time in the market is far more important than timing the market.

In the long term, the Indian stock market will go up along with the Indian economy.

Instead of trying to anticipate or react to every small move in the market, a better thing to do would be to make a watchlist of high-quality stocks and act on them when valuations become reasonable.

We believe the best approach for investors remains unchanged:

• If there is a correction, don't panic.
• Stay invested in high quality stocks.
• Avoid/sell stocks with poor/deteriorating fundamentals.
• Keep high quality stocks on your watchlist if the valuations are expensive.
• There is nothing wrong with sitting on cash if you can't find stocks in your comfort zone of fundamentals and valuations. A correction might make some of these stocks attractive.
• When investing your hard-earned money, prioritise your personal asset allocation over everything else.
• Avoid FOMO (fear of missing out) like the plague.
• Focus on long-term investing. If you are not a trader or not interested in becoming one, then don't trade.

In our view, even if there is a correction now, the Nifty will recover and break out to new highs.

As long as the upmove, when it comes, is backed by strong earnings growth and not just sentiment, you don't have anything to be worried about.

Right now, it's all about staying calm amid the volatility and staying invested in fundamentally strong stocks...and looking to buy them if there is a short-term correction.

Market declines will come and go but the basic principles of long-term investing will not change.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...