The market rallied. So what?

By Larissa Fernand |  27-03-20 | 
 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Over the past 48 hours, these are some of the headlines I came across online:

Sensex rallies 1,400 points / Sensex surges 1,500 points / Sensex posts biggest gain in 11 years / Sensex logs biggest session gain since 2009 / Stellar recovery

I went on to a WhatsApp Investment group that I am part of to see the reaction. Some were exuberant, convinced that the worst is behind us.

A lone voice jumped in and urged everyone to exercise caution: We are not done with the downside. This is a bear market pullback where 20-25% from the bottom is normal.

I completely agree.

I remember the Sensex dipping in October 2018, down from its then all-time high of 38,989. A friend told me that the market would only drift lower from then on. Well, last year, the Sensex broke all records and scaled up to 41,000.

Just as you have corrections in a bull market, sharp rallies are common in bear markets, where you see a dramatic recovery following a huge sell-off. Do not mistake this to be a sign that the bear market is over and done with. These short-lived flashes of upward momentum offer false hope.

I was recently presented with some data on the stock market crash of 1929, the movement of the DJIA:

  • Sep 3, 1929: 381.17
  • Oct 29, 1929: 230
  • Nov 13, 1929: 198
  • Apr 17, 1930: 294 (impressive recovery)
  • Jul 8, 1932: 41.22 (you read that right)
  • Mar 15, 1933: 62.10
  • March 10, 1937: 194 (another recovery before dropping to 98 the next year)

Volatility is a given when it comes to equity markets. Does not matter which country or which era. Prices of stocks will go up and down. And there will be upturns in bear markets and downturns in bull markets. There is nothing to fear or get enthused about. In fact, what is a cause for tremendous worry are knee-jerk reactions to the indices, because they can send your portfolio for a toss.

Here are 4 guidelines on how to act now.

  1. It is fundamentals that should drive all your investing decisions.

A tumbling stock price need not be a business in dire straits. It says nothing about the intrinsic worth of the company. Stock market declines are never a curse if your vision is to create wealth years down the road. Recessions are not the end of the world, or of stock markets.

  1. If you do not want to buy, that is fine. But please do not sell your investments in haste.

People lock in their losses by pulling out at the bottom of a downturn. As Morningstar’s head of behavioural science, Steve Wendel, says, “It’s not the stock market decline itself that hurts investors per se; it’s that they exit and then miss out on the subsequent market upswing; which will happen, it’s just a matter of time.” If you have ongoing SIPs, do not stop them now. Or else, the entire purpose of systematic investing would backfire.

Daniel Needham, Morningstar’s chief investment officer, has a neat suggestion: “The most important thing could be to actually not do anything.”

  1. Use market upswings to your advantage.

A friend confessed to me that while the bulk of her portfolio is in for the long haul, she was not comfortable with the way things are. What if I need some money in the near future? A long bear market will be detrimental from that aspect.

She has a point. Unfortunately for her, she does not have an emergency fund. And neither did she plan her goals and base her asset allocation on them.

In her case, a practical move would be to sell some of her stocks or equity fund units during market upswings. That would give her some comfort level.

  1. Get a reality check done.

You might be familiar with Warren Buffett’s quote: Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.

In a bull market, we would all nod vigorously in complete agreement. Sure of ourselves. Well, now is the time to see if that is really the case. Can we take such market declines in our stride? Can we live with tumultuous volatility and uncertainty?

Ian Tam, director of investment research at Morningstar Canada, believes that this is the time to do a gut check: "If you feel that your portfolio value has fluctuated too much, that probably means that you're taking on too much risk. Consider using all the attention and energy that the market turbulence has brought out in you to take the time to reconsider your risk tolerance and recalibrate your long-term asset allocation decision, or the mix between stocks, bonds and other asset classes, and ensure that it's appropriate for the level of risk that you can comfortably take on as opposed to making a short-term tactical change in your portfolio.”

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