The Indian stock market is facing a rough patch after two years of a strong rally in the calendar years 2020 and 2021. The benchmark BSE Sensex has been down nearly 9 percent since January this year and has been almost flat in the last 12 months. A poor return in the past 12 months and price volatility have been scary for many investors, especially those who were used to the easy returns that the market provided in the post-Covid period until recently.
Stock prices never move in a straight line and every big dip in stock prices is followed by a rally and vice versa. The problem, however, is that no one knows for how long the current bear phase in the market will last. But if history is any guide, then the stock market has a 100 percent recovery rate from even the most severe downturns such as the year 2000 dot-com crash or the 2008 global financial crisis.
Given this, you should use the current downturn in the stock price to build a portfolio that will thrive once normalcy returns on Dalal Street. Investment in a market downturn however requires lots of patience and discipline. Here are five tips that will help you stay on course.
1. Keep your eyes on the future potential rather than past performance. It’s very tempting to buy stocks that have fallen the hardest in recent months and look very cheap. But there is no guarantee that these fallen heroes will also see a rise in their stock price when the rally resumes on the street in the near future.
2. Best returns can come from stocks that may have fallen the least. The general thumb rule of stock investing is that you should buy low and sell high. This means buying the cheapest or the lowest-priced stocks and then selling them when their prices rise. But cheap stocks can also be value traps and the ones that may never rally even when the overall market starts going up. This could be because these value stocks may be from dying industries or those not likely to grow at all in future.
The relative outperformance of these stocks could be due to the evergreen nature of their business which makes them likely to be rally leaders in future.
3. Buy a business rather than a stock. If a company has a good and successful business that can survive an economic downturn, then it’s a matter of time before its financial success will start reflecting in its share price. So if you are looking for good stock to invest in during a downturn then pick a business that you understand and are convinced about, then invest in its stock.
4. Don’t get intimidated by short-term price volatility. It’s not uncommon for a stock to see a sharp and unexpected decline in its share price after you have invested in it. If the decline in share price is not related to any development in the company or its industry and you stay convinced about its business, then ignore the short-term price volatility and stay invested. Have a three-to-five-year price target in mind and stay invested till you achieve it.
5. Build up your positions or portfolio over time. Never be in a hurry to build a large portfolio.
This way you buy more stocks when the price goes down and fewer shares when it rises, but in the long-term, it evens out the average acquisition price. Staggered investment or accumulation is also a good way to protect your investment from extreme volatility in stock price which is a common feature of any bear market. Similarly, book profits or sell stocks from your portfolio over a period of time rather than in one shot. This will help you maximise your gains.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
Also Read: Ten value for money stocks to buy right now