Market Jitters: 6 Lessons Smart Investors Live By

Indian equity markets saw a major dip on 4 June, 2024, and for good reason: after all, it was the day of the Lok Sabha election results. And what many expected did not happen. As is often the case, in investing. The market was jittery, and preliminary results that ran in the face of exit polls took investors over the edge, leading to panic.

While a good recovery ensued the very next day, it led us to thinking that for serious investors, such events yield lessons that are likely to prove useful in the long-term.

Here are 6 lessons mutual fund investors can take away.

1. Even one-day falls can be good long-term opportunities

To paraphrase our friends at @etmoney:
The uncertainty around the election results caused Nifty 50 to fall over 5% on 4 June, spooking rookie and veteran investors alike. But if history is to be believed, such a major dip is a great time to enter the markets.

Since 2000, Nifty 50 has fallen 5% in a single day on 31 occasions. And on 18 of those 31 times, it was up 20% after a year’s time.

Or take the Global Financial Crisis (2008) and the COVID pandemic (2020) as examples. Despite initial drops of over 12%, the market bounced back, delivering returns exceeding 90% after a year. This highlights the resilience and potential of long-term investing, even in the wake of significant market declines.¹

2. Keep some cash handy

So clearly, market crashes like the one day dip that just happened, can be excellent opportunities to buy the dip. But how would you do so, if you didn’t have some liquid cash set aside for exactly such unexpected times?
You might think that there’s no need to keep cash on hand, because if such a time comes, you could always switch into a more aggressive position from an erstwhile defensive one- for example moving out of liquid fund to a blue-chip equity fund.

But remember, switch transactions in the MF world are not instant. In fact, your inflow transaction into the equity scheme from the switch, could take a few days - meaning you may miss out on a temporary dip.

Long term investors swear by SIPs and STPs as a more ‘boring’ way to take advantage of fluctuations, as they should. But frankly, there’s no real substitute to liquid cash in such situations.

3. Don’t forget the margin of safety

In the context of mutual funds, the simplest way to apply the margin of safety concept is to consider a few fund additions to your portfolio that have a lower leverage level overall and follow a more conservative investment approach, which may help mitigate risks. This also feeds in to the next point.

4. Ups. Downs. Up again. And then down again. Diversify.

The electoral journey we just went through as a nation, is just one example of events that markets may get affected by. Two facts you must remember:

1. No one knows.
2. Anything can happen.

Hence, plan for constant growth but be prepared for ups as well as downs.

How? By diversifying and following some basic level of asset allocation.

Different asset classes and sectors are susceptible to different stimuli, so it’s wise to spread risk out (by investing in a multi-asset fund, or by investing in debt or international funds in addition to your equity funds, for instance).

Here’s how a multi-asset fund would’ve fared against Nifty 50 during the 2008 financial crisis and Covid^1,2:

Only equity (Nifty 50) vs a multi-asset strategy during the 2008 global financial crisis

Only equity (Nifty 50) vs a multi-asset strategy during the Covid pandemic

It’s a no-brainer: If you’re an equity market investor, diversification can reduce the impact of large falls, making recovery that much easier. And on the other side, if you’re only investing in guaranteed return products (like RDs/FDs etc), then some diversification into equities can also result in better wealth creation.

5. Emotional regulation is key

Panic and over-excitement can blur the real picture. If you have a good strategy in place, stick to it, even if it means avoiding potential opportunities. Don’t let your emotions trump rational decisions and data.

Source:Investment Wisdom on X

Many smart people also ask, aren’t these great opportunities to take a quick low-interest loan and invest that money to try to make a quick buck from such falls? Two things to keep in mind: Borrowing money from friends or family during volatile and emotional times is risky, both for your relationship as well as just your ability to return the money back in time. Yes, 0% or interest-free loans sound like a win-win, but if the market continues to fall further, your losses might continue to grow. There is certainly an upside that seems exciting, but on the other side stare loneliness and being bankrupt.

And high-interest personal loans from banks etc. at such a time? STRICT no-no.

If you find yourself thinking about such things often, you must consider talking to an expert MF Distributor. There's no substitute for an expert, especially if you're considering risky moves like using leverage while you're in an emotionally turbulent state of mind.

6. Your courage is what might separate you from the rest!

One of India’s leading investment experts, Gurmeet Chadha, said something very powerful, which every investor should pay attention to:

Source: Gurmeet Chadha on X

Of course, don’t feel the pressure to invest in the market, just because others around you may be doing so. If your existing strategy is working just fine and you value your peace of mind rather avoid unnecessary complications, there’s nothing wrong with keeping away.

But it’s also important to absorb the gravity of what Napolean said while describing a military genius. Absolutely describes a good investor too:

Stay steady, but be agile when needed
So there you have it. Use this latest market dip as a personal learning experience, and see what you could have done differently.

Remember, there will be more times when the market will misbehave again. It’s in its very nature. But what separates the wheat from the chaff? What David Packard, an American electrical engineer and co-founder with Bill Hewlett, of Hewlett-Packard said:

¹ Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments. These figures pertain to performance of the index/Model and do not in any manner indicate the returns/performance of the Scheme. It is not possible to invest directly in an index.

² Nifty 50 TRI, CRISIL Ultra Short Duration Debt B-I Index, XAU/INR considered for Indian Equities, Indian Debt & Gold respectively. Annual rebalancing considered.