Why a falling market is actually good news -Harish Menon

The current global macroeconomic setup has many investors and industry experts believing that developed markets led by the United States could be headed for a recession. Typically, an economic downturn leads to a correction in risk appetite and the prices of risky asset classes like stocks. The stock market usually enters a bear phase, i.e. stocks are falling or are already at their lowest during a period of recession and economic slowdown. The current market decline could be attributed to the withdrawal of liquidity by global central banks to combat high inflation for several decades. As interest rates are raised by central banks, the cost of money becomes expensive.

Although financial markets work in mysterious ways, they are guided by a set of factors that influence their movement. In the short term, the markets are driven by news and in the medium term by company performance. Over the long term, markets are driven by macroeconomic forces and fundamentals. A declining or bearish market presents an excellent buying opportunity for investors looking for long-term gains. Investors who endure in the face of declining portfolio values ​​and market volatility will benefit the most over the long term.

Stay invested for long-term gains

Most investors and experts build a portfolio by taking market declines and crashes into account. The key for investors during the recession is to believe in their portfolio and stay invested in the market instead of jumping ship. Adopting a long-term mindset benefits investors the most rather than short-sightedness.

A quick look at long-term historical charts of stock indices like NIFTY or S&P 500 reveals that the market rebounds every time after a significant correction. Investors who panic during a market crisis often end up regretting their choice because they miss out on the gains that follow such a decline.

Investors should remember that a bear cycle is temporary and the ensuing bull market tends to erase losses and even prolong gains. This is the phase where long-term investors can consider adding more equity. Topping up the monthly SIP is a very efficient way to do this.

Evaluate your stock portfolio

A decline of 10% or more in the financial market often occurs to correct artificially inflated stocks and commodities. This is called a market correction and presents a good opportunity for investors to evaluate their stock portfolios. Stocks that don’t rally when the markets do are usually weak stocks with little chance of becoming multi-baggers. On the other hand, stocks that return to their pre-recession valuations are fundamentally sound stocks with long-term prospects.

During a market correction, investors need to identify weak and strong stocks in their portfolios. Weaker stocks can be sold and the money can be reinvested in good stocks that trade at lower valuations. Therefore, a bear market should be seen as an opportunity to rebuild the portfolio.

Diversify your investments

Whether the market is bearish or bullish, investors should always keep in mind the golden rule of investing: diversification. Having a mix of stocks is a great investment strategy instead of investing in a single stock. Investors can always consult experts to build a balanced portfolio with a mix of stocks, bonds and real estate to minimize their risk and maximize rewards. Additionally, investors with a fondness for the stock market can reorganize their money into various stocks from different sectors.

Add weight to equity

For investors aiming to be a net buyer of stocks over the next few years with a long-term horizon, market declines are great news indeed. Any decline in the stock market presents an opportunity for investors to buy stocks at lower prices, especially from a 10-20 year perspective. In a bear market, even stock prices of fundamentally good stocks in growth industries and healthy earnings also fall.

A recession is an ideal opportunity for investors to increase their equity allocation at favorable prices. Instead of panicking and selling all stocks at a loss, investors should add more weight to the equity portion of their portfolio. As a result, investors should fish to the bottom and accumulate good stocks and great values ​​for their portfolios.

Final Thoughts

In times of market volatility and economic downturns, two great skills investors need to possess are patience and discipline. Having confidence in one’s investment strategy is vitally important to successfully managing any portfolio, especially for investors with long-term investment strategies. As the market and portfolios decline, investors should focus on long-term gains and hoard strong stocks at deep discounts instead of selling out of fear.

Disclaimer: The views expressed in the article above are those of the authors and do not necessarily represent or reflect the views of this publishing house. Unless otherwise indicated, the author writes in a personal capacity. They are not intended and should not be taken to represent the official ideas, attitudes or policies of any agency or institution.