Market declines are as common as the seasons of the year. While you cannot stop a market from declining, you can definitely prepare for a downturn. If you are a new investor, you must often wonder what to do when markets decline. The answer lies in devising an effective strategy to weather the storm and protect your portfolio. This article outlines what to do when markets decline to help you safeguard your portfolio and seize opportunities when markets start going south. 

• Diversification across assets, sectors, industries, and geographies helps protect your portfolio.
• Refocusing on your long-term goals and evaluating assets in your portfolio can help tackle market declines.
• Market downturns can offer good value investing opportunities. 

Here’s a list of a few things you can do when the market declines:

Know your portfolio

When markets decline, you must thoroughly assess each stock in your investment portfolio. This means reviewing its fundamentals, which include earnings, revenue growth, and debt levels. Additionally, you must look for industry trends and changes in the company’s outlook, which can impact the stock’s performance. Conducting this evaluation helps you determine the long-term value and growth potential of the stock to avoid making hasty decisions based on short-term fluctuations.

Spread risk wisely

If you’re wondering what to do when markets decline, the answer lies in a simple word: diversification. Diversification helps you spread your investments across asset classes, industries, and geographies to reduce the impact of a single sector’s downturn on your portfolio’s returns. In short, it acts as a safety net since assets that are yielding poor returns get balanced out by others that are offering positive or stable earnings. Therefore, curating a diversified portfolio of stocks, bonds, real estate, mutual funds, gold, and other assets is ideal. Additionally, you should focus on diversifying even within one asset group. So, if you’re investing in stocks, diversify across sectors like technology, healthcare, consumer durables, etc. While diversification does not guarantee zero losses, it definitely helps mitigate the risk of hefty capital loss and ensures long-term stability.

Consider buying in the dip

Another good strategy you can implement is a value-based buying approach. Declining markets can offer unique buying opportunities to purchase high-quality stocks of top companies at discounted prices. The key to this approach is looking at the fundamentals of the company. Companies with strong fundamentals and a track record of good performance, coupled with a strong long-term growth potential, are ideal. Remember to base your purchase decision on research and fundamental analysis. Consider industry trends and competitive advantage as well. Essentially, you must evaluate if the price decline in the stock is due to temporary factors or due to a genuine long-term issue. If it’s the former, the stock is essentially undervalued. Therefore, if you’re looking for things to do when markets decline, consider this approach to find value early and reap its benefits once markets bounce back.

Focus on the long-term

When considering the things to do when markets decline, it’s crucial to refocus your attention on the long-term horizon. Remember you invested in the market to reap long-term returns. While short-term fluctuations are common and inevitable, they should not derail your long-term strategy and investment goals. Historically, markets have rebounded over time, producing high returns with each rally. Therefore, the losses you experience currently are temporary. Sticking to a well-researched investment strategy at this juncture is vital to benefit from market recoveries once the bear phase ends.

Leverage tax laws

Leveraging taxation laws is yet another way you can find answers to questions about what to do when markets decline. When markets fall, you have an opportunity to optimise your tax liabilities through a strategy called tax loss harvesting. The tax loss harvesting strategy involves selling assets that have experienced losses to offset capital gains taxes. According to the Indian tax laws, your capital losses can be carried forward for up to 8 consecutive years to offset future capital gains. By strategically implementing the tax loss harvesting strategy, you can potentially reduce your tax liabilities and generate tax savings while weathering market declines.  

Now that you know all about the things you can do when markets decline, here’s a list of things you should avoid when markets start to fall:

Avoid panic selling

One of the most common mistakes investors make is panic selling their positions at the slightest sign of trouble. While the temptation to sell when markets start declining can be hard to resist, making hasty sell decisions can cost you dearly over the long run. When markets are falling, stock prices are already low. If you sell now, you will incur losses and miss out on potential price appreciation in the future when the short-term fluctuations die down. In short, panic selling leads to a loss of potential future gains.

Stay away from impulsive buying

While it’s prudent to look for undervalued securities and top stocks at bargain prices, you must avoid the temptation of impulsive buying. It is important to base your purchase decision on thorough research so that you can look beyond the current price decline and evaluate the company’s fiscal health in general. You should purchase the stock only if you find long-term value in it. 

Declining markets are common and inevitable. As an investor, you must learn ways to handle declining markets rather than exiting your position each time the waters turn turbulent. You can implement the tips and strategies highlighted in the article to understand what to do when markets decline. Focusing on your long-term vision, reviewing your portfolio, embracing diversification, looking for value opportunities, avoiding panic selling, and leveraging tax laws can help you sail through these turbulent times in a structured manner. Remember, downturns are always temporary and making sound choices helps preserve your future returns. If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.