What to do with your investments when markets are falling

Falling markets are a part and parcel of the investing process. Despite the inevitability of market down-turns, it’s natural to worry about what to do with your investments when markets are falling. Should you keep your portfolio undisturbed? Or, should you cut your losses and redeem your investment? These are common questions that plague the minds of investors. The answer to the question of what to do with your investments when markets are falling varies from one investor to the next. It is based on various subjective factors like your financial objectives, time horizon, financial standing, and risk tolerance capacity. In this article, we outline a few strategies you can consider when deciding what to do with your investments when markets are falling to help you make sound decisions to weather these periods and thrive in the aftermath.

If markets are falling, you’re probably wondering what to do with your investments. When markets fall, investors tend to align with one of two perspectives. Either investors believe that the situation will only get worse and remain bad for a long time. Such investors prefer to redeem their investments before the markets fall further. Or, investors believe that this period of volatility will be short-lived and markets will soon recover. Therefore, it’s better to hold on to your investments and make good returns once the market rebounds. Both these perspectives have their pros and cons, but neither concretely answers your question of what to do with your investments when markets are falling.

The best way to answer this question is to evaluate your investment objectives. When you assess your investment objective, you will understand if your investment was targeted towards achieving a long-term financial goal or was it aimed at churning out a quick profit by timing the market. Based on the answer, you can understand what to do with your investments when markets are falling.

• Continuing SIP investments in falling markets is crucial to attain good long-term returns.
• Diversification across assets can help protect your portfolio during market down-turns.
• Focusing on fundamentals and staying aligned with your long-term vision is vital to weather short-term fluctuations.

If you pick the first answer, where you have invested to realise long-term goals, then there is no need to panic. As a long-term investor, you must be acclimated to market volatility in the short-run. Market rallies and crashes are natural, but markets tend to recover over the long-run. Therefore, as a long-term investor, you can implement these strategies to manage your investments when markets are falling:
 

Keep SIPs running

SIPs are one of the best investment modes to handle short-term volatility. The rupee-cost averaging feature of SIP investments allows you to avoid market timing. Instead, you can invest a fixed sum at regular intervals, regardless of market conditions. Continuing your SIPs during falling markets is actually beneficial because you acquire more MF units as NAV drops. When markets recover, you can potentially maximise your returns by redeeming your investment at a higher price per unit than the original purchase cost. You can also estimate yields from SIPs using Mutual Fund Calculator tools available online.

Stay aligned with your long-term objectives

If you are a long-term investor, you probably have an investment horizon of 7-10 years. This means you need not worry about short-term market corrections or interspersed bear markets. Historically, markets have always recovered and offered higher returns over the long-run. Therefore, if you’re wondering what to do with your investments when markets are falling, simply stay focused on your long-term objectives. The goals you wish to achieve are years away and markets will recover by then. Additionally, mutual funds are managed by experienced fund managers. This is in fact one of the chief benefits of investing in mutual funds. They will take stock of the market conditions and make the right decisions to benefit investors. Remember that each mutual fund scheme factors in possible market risks and corrective measures to create contingency plans to survive bear markets.

Diversify

The diversification approach is not a suggestion on what to do with your investments when markets are falling, but rather a more suitable strategy to implement when markets are relatively stable. Curating a well-diversified portfolio acts as a boon during periods of market volatility, hedging your returns and ensuring relative stability. Diversifying your portfolio simply means adding assets with low or negative correlations to minimise risks. For instance, if you have an equity-focused portfolio, you should try balancing it out with debt funds. Adding a small gold component to your portfolio will also help since the yellow metal has historically served as a convenient hedging asset. Generally, when markets fall, gold prices rise. So adding gold may be a prudent choice.

Focus on fundamentals

If you have invested in the equity markets directly, the best way to weather falling markets is to refocus your attention on the fundamentals. In simple words, if you’ve invested in a company’s stock due to strong fundamentals and growth prospects, then hold on to your investments. In fact, if the fundamentals of the company haven’t changed, buying more stock in falling markets may be prudent because you get to purchase them at a lower price. The price of the stock may rebound once the markets recover, bringing you good returns.

If you fall under the second category of investors who have parked their capital for short-term gains, it may be a little tricky to understand what to do with your investments when markets are falling. As a short-term investor, you can review your stocks and MF holdings to check if your investments can actually weather this volatile period. Additionally, check to see your liquidity needs, financial standing, and if you can indeed withstand potentially hefty losses. If you do not require the invested amount immediately or can afford a few risks, it’s best to extend your investment horizon a little longer. Hopefully markets recover soon to help you reduce losses and even mint some gains.

Every successful investor knows that markets go through periods of upswings and downswings. However, they possess the ability to tune-out the general noise and panic during market down-turns and focus on their own goals. Therefore, if you’re concerned about what to do with your investments when markets are falling, it’s best to go back to the basics and reassess your objective. If you have long-term objectives, it’s best to stay invested because markets tend to rebound over time offering good yields to patient investors.

Falling markets present one of the best opportunities to start investing in mutual funds via SIPs. You can get started with your MF journey on the Bajaj Finserv Mutual Fund Platform that allows you to compare mutual funds. You can start investing with SIPs of just Rs. 100 and watch your corpus grow over time.