The last two days have been quite unnerving for equity investors. After a bull rally that started last year and drove benchmark indices to their lifetime highs, the recent correction in the stock markets has been nothing less than a rude shock for investors. BSE-Sensex has lost 1000 points in just two days. As an article in Firstpost suggests, 4.45 lakh crore of wealth has been eroded in 2 days.
Indeed, retail investors have been one of the worst victims of this correction. Only months back, when brokers were selling Sensex at 40k, few paid heed to the warning that stock markets were running ahead of fundamentals. It took a combination of poor earnings season, loss of confidence of foreign institutional investors (FIIs), RBI's guidance that a limited room is left for further rate cuts and most recently, a weak monsoon forecast for markets to wake up to the ground realities. And the sharp correction just underscores how slippery the grounds were for gains.
First of all, investors need to understand that volatility is a part and parcel of investing in equity markets. In a little over last two decades, there have been multiple bull rallies and some serious corrections. And overtime, the returns have been good.
If you as investor can practice long term value investing, such volatility could be your best friend. So find the stocks with good fundamentals, and pay a price that they justify. Such corrections could be an opportunity to bring such stocks close to or within the comfort zone as far as valuations are concerned. Most importantly, keep your portfolio diversified to minimize the risks. And then all you need to do is nothing and let the fundamentals play. The key is not to get panicked by corrections and have the disciplined mindset of a long term value investor. If you can take that challenge, the power of compounding could earn you huge returns overtime.