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7 Tips To Survive A Stock Market Crash - Outside View by PersonalFN

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7 Tips To Survive A Stock Market Crash
Jun 3, 2017

"2,000-point Nifty rally in next 12-16 months"

"Nifty may touch 13,000 in three years"

"Sensex to touch 45k by 2020"

"Sensex to touch 54,000 by 2018"

We can go on and on, but you get the drift right?

Over the past quarter, these headlines have cropped up quoting experts, research houses, and brokerage firms. In a bull market rally, investors are not short of optimism. This is what takes the market higher and at times, command obscure valuations.

For an average investor, it becomes difficult to discern the truth in the numbers, especially when those numbers get more outlandish and difficult to conceive. Though there are compelling reasons why the market could keep heading higher, investors should start being more cautious rather than excited.

Do not rely on economic, stock market, or interest rate forecasts to underpin your investment decisions. With experts and analysts futzing with their Sensex and Nifty targets, an over-reaction is imminent. Herding and other behavioural factors come into play. It won't be too long before fear strikes.

Momentum is fickle, and given our herd mentality, the market can turn on its head. We don't know when, but when it does happen, your portfolio should be in a position to keep afloat during the turbulence.

Now is a good time to start preparing for the possibility that the market may, at the very least, cool off. Remember, the key is to remain unemotional and analyse the situation in a calm and rational manner. This will lead to prudent investment decisions.

PersonalFN has put together seven tips below to help you sail through a market storm.

  1. Rebalance

    Review your portfolio asset allocation at least once a year. If it hasn't been done in a long time, now is the best time to get down to doing it. It is good for your financial health to rebalance when an asset class generates extraordinary returns or makes extraordinary losses. In simple words, rebalancing a portfolio is correcting the deviations in the original allocation. For example, initially you invested 70% in equity, 20% in debt, and 10% in gold. Assuming after a year, equity became 80% of the portfolio, and gold accounted for 12%. You will then need to reduce the exposure to equity, and gold to achieve the initial asset mix. This helps safeguard investments from a bad market phase not only by booking gains, but also by reducing the exposure to risky assets.

    Read more on rebalancing here - Are you rebalancing your investment portfolio wisely?
  2. Diversify

    Don't approach the equity markets, or any investment opportunity, with all your eggs in one basket. Diversification is essential to manage risk. Remember to focus on sufficient, not excessive diversification, as the latter can lead to 'di-worse-ification'. By this we mean, spreading an investment over 4-5 equity funds from different categories. Investing in 20 different equity funds will lead to over-diversification, which can lead to suboptimal returns. Similarly, diversify your investment across asset classes by maintaining the right asset allocation. Taking into account factors such as age, income, living expenses, and nearness to goals, can help build a rationally diversified portfolio across asset classes.

    Are you diversifying your portfolio wisely? - Read here to know the 5 ways to achieve proper diversification
  3. Time-varying risk control

    It's prudent to reduce exposure to risky assets when nearing the target date of a financial goal. This ensures that unpleasant market surprises will not stop your dreams from turning into reality. If you started with an allocation of 80% towards equity, consider reducing it gradually to 10%-20% as you approach the target date. Take advantage of Systematic Withdrawal Plans (SWPs) offered by mutual funds to steadily reduce the equity exposure. By withdrawing at regular intervals, you reduce the risk of redeeming the entire equity investment at an inopportune time.

    Read here how to optimise STP/SWP options wisely
  4. Look out for opportunities

    A market correction is a fitting time to go out shopping-shopping for equity investments that is. Don't be saddened that your investments are not doing well if the market corrects-make volatility your friend. If you are investing towards long-term goals and have surplus funds that isn't needed for the next 5-7 years, dips in the market are a good time to put that money to work. Higher investments when the market hits a low helps average out the cost better. A market correction should be greeted as a buying opportunity for more gains ahead. Remember to keep a long-term focus.

    Is Market Correction An Opportunity To Invest In Value Funds? Find Out Here...
  5. Don't neglect your contingency fund

    The ability to take risk also depends on whether you can financially withstand a loss. Therefore, it is important to keep at least six months and up to 24 months of expenses aside as a contingency fund. The purpose of having a contingency fund is to take care of expenses in case of a financial emergency, such as, a job loss, medical emergency or any unfortunate event that comes with an economic loss. This reduces the need to dip into equity assets in times of emergency. Even if the markets correct, you will have peace of mind with a contingency fund in place. Regularly review the contingency fund to ensure it is sufficiently stacked up to meet current expenses.

    Also read: Why is a Contingency Fund so important?
  6. Don't give up on your financial plan

    A correction in the market might push planned financial goals even further into the distant horizon. With the market value of your portfolio falling, the investment goals may look harder to achieve. But over the long term, the market will eventually bounce back. Therefore, even if the market moves sideways for years, don't stop ongoing investments. The moment the market heads up, you will once again be on the targeted path to achieve the set financial goals. When on the path to achieving your long-term financial goals, if there is a disruption, always remember point 4.

    Read here on How To Grow Rich With Financial Planning
  7. Get help if you need it

    Planning personal finances and setting investment goals can be a simple, yet painstaking process. You need to allot some time to review ongoing investments and readjust financial goals, if needed. Unfortunately, not all of us may have the time or the affinity for numbers. In such cases, it will always be prudent to consult with an expert. After all, no one wants his or her hard-earned money to be wiped away because of negligence. Hire a financial planner who is ethical and devoid of any biases. Choose a Certified Financial Guardian (CFG), who will safeguard your financial interests. A financial guardian is trustworthy; an advisor who puts your interest before their own. Getting help at this crucial market juncture will ensure that your portfolio is optimally prepared for a market crash.

    Read here to know more about the CFG program

Those who have just begun investing in equity shouldn't feel disappointed in case the markets go through a correction. When investing in equities directly or through mutual funds, it is essential to keep an investment horizon of at least five years. Focus on creating SMART financial goals and balancing your asset allocation right. Continue to invest regularly through a Systematic Investment Plan (SIP). This will help average out your buying when the market conditions get tougher. Remember, investing in equity requires discipline, patience, and perseverance.

For those who wish to strategically align their portfolio to ride the market waves can subscribe to PersonalFN's Strategic Funds Portfolio for 2025. It consists of a Core and Satellite portfolio, which aims to have the best of both worlds, that is, short-term high-rewarding opportunities and long-term steady-return investing.

The core portfolio offers stability by investing in funds that promise sturdy returns and have a strong ability to manage downside risk. The satellite portfolio provides the opportunity to support the core by taking active fund calls determined by PersonalFN's extensive research on mutual funds. Subscribe here to PersonalFN's Strategic Funds Portfolio for 2025 to avail of attractive discounts.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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