According to some share market pundits, you have to be a contrarian to succeed in the stock market. It means that rather than going according to popular opinion and what the news says, you should go against the tide. For instance, if you are in the share market for the long run, you shouldn’t shape your opinion according to every breaking news or what your neighbour says. You need to carry out some research and make an informed decision.
Currently, the burning question that gives sleepless nights to many Indian investors is this: Should I buy, hold or sell during this ongoing slowdown and the imminent recession that may grip the nation? The United Nations has already declared that a global recession in 2020 is a clear and present danger.
If India is unable to move out of the slowdown by 2020, the impact of the global recession may act like a double whammy. Historically, however, most robust economies have made a recovery out of a recession and India is fundamentally a robust economy.
If you are worried about the future of your equity investments, here are some common sense, practical and simple formulas to help you decide whether you should buy, hold or sell during a recession.
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What is a recession?
Some people and even some so-called experts on TV speak about recession as if it is the end of the world. The Investopedia calls it “a fact of life” and “an extended period of a significant decline in economic activity.” There are various definitions of a recession but one yardstick according to economists is two consecutive quarters of negative GDP growth.
Experts maintain that what India is facing now is not a real recession but a growth recession where the economy continues to grow but at a slower pace.
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Your game plan for a recession
Buy good stocks when it bottoms out
A recession is the best time to buy stocks from companies with strong fundamentals. The decline in stock prices of a good company may not be due to the company’s performance but may be just echoing the overall market sentiment. This usually happens during an economic downturn or a recession.
People were emptying their portfolios of good companies during the recession of 2008. But if they were selling, there were some who were buying these good stocks at dirt cheap prices. When the economy did a rebound, they made a killing and laughed all the way to the bank.
Bottom line: Wait for good stocks to bottom out and buy them and keep them until the economic situation improves.
Hold them when the going gets tough
Investing in equities is a game of psychology and there is a separate body of science called behavioural finance to explain it. However, the simple thing about all this is that you should eliminate fear, greed and impulsive decision making.
What you need is patience, diligence and self-control. Once you know that your company is doing well, you should stick to it. Don’t act with fear because of market sentiments when you know that you have invested in the right stock. Don’t hold too long because you may be driven by greed to make more profit. Finally, don’t invest using intuition, instinct and dreams or your financial health may become a nightmare.
Bottom line: Hold on to good stocks even when the going gets tough.
Sell at the right time
As Warren Buffet said, “buy low, sell high.” But for the average retail equity investor, it’s hard to figure out when to get out of a high. Even if he identifies the right time to exit, greed may stop him. That is where your attitude towards equity investing will make a big difference.
Ask any share trader, they make a living by trading shares but they never consider investing in stocks as gambling. But for the uninitiated, equity investing is akin to gambling, where you hold on to a bullish stock until the bear starts a rampage.
Bottom line: Don’t let greed stop you from selling a stock when you have made a certain level of profit and all indicators are showing that it’s time to sell.
Recession or a boom, equity investing works out well when you have a long term investment horizon and you are able to see the big picture. You shouldn’t react to every bad news and market forecast but understand that most things in the stock market are cyclical.
In conclusion, you must have a certain degree of risk appetite for investing in equities during a recession and you must know what you are doing. If you want to shield your investments against market volatility and economic downturn, you should invest in mutual funds or ULIPs. At Finserv MARKETS, you get access to top rated mutual funds and ULIPs that can be customized according to your life goals and investment horizon.
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