Keep calm and invest on

In theory, every investor knows that the stock market is a fickle beast. In practice, when markets enter a period of decay, it's normal for investors - even seasoned ones - to feel uneasy and stay awake with some unanswerable questions: will it keep dropping until they hit zero? How long will this downturn last? Is now a good time to buy the dip? The questions don't have answers, but there are some tried and true principles long-term investors can follow to help ride out periods of volatility.

Resist the urge to panic when stock prices are falling sharply. But more often than not, impulsive selling during downturns locks in losses and makes it hard to participate when the recovery eventually comes. A better strategy is to focus on your long-term goals and avoid making fear-based decisions. Remember that market corrections and bear markets are normal in the investing cycle. Historically, the Indian markets have always recovered to new highs, and that too in fairly short order. Times like this are an opportunity to rebalance one's investment portfolio. Rebalancing essentially means selling assets that have increased significantly and buying assets that have fallen. This allows you to buy low and sell high. Rebalancing also returns your portfolio to your original target asset allocation, controlling risk. Downturns present a good opportunity to rebalance back to stocks at lower prices.

Interestingly, when stock markets are down, many investors' reactions and panic are directly fed by how well they manage their financial lives outside the markets. To be a good equity investor, ensure you have an emergency fund with enough cash to cover a few months of expenses. Do the obvious things like pay off high-interest debt, defer large discretionary purchases, and explore income diversification if possible. People who do these things become better equity investors even though these have nothing to do with equity. A panicked head will not make good decisions in any aspect of life.

In any case, volatility is an integral part of the package. There will always be downturns, corrections, and bear markets mixed in with the uptrends. But historically, over decades, the overall trajectory of the stock market has been up through wars, crashes, bubbles, and panics. Maintain a long-term mindset and ignore short-term noise. The nature of investors' errors has seriously changed in the last decade or so. There is now a gigantic amount of noise generated by mainstream and social media. Trends like crypto and profitless digital companies make it worse. This constant barrage of information, opinions, and hysteria surrounding short-term market moves can lead to poor decision-making driven by FOMO, YOLO, FOBI and their older counterparts, greed and panic. It's crucial to tune out the noise, stick to fundamentals, focus on intrinsic value, and keep your eyes on the long-term portfolio goals.

An investing framework based on logic rather than emotions provides stability during manic markets. Despite these apparently new phenomena, diversification is the cornerstone of stock investing safety. However, only some investors realise that diversification works consistently well only for long-term investors. Markets tend to converge to the mean over time. Over short periods, almost any principle can collapse and not work. Ultimately, rather than panicking over price fluctuations in the broader market, focus on finding high-quality companies trading at a discount. Market downturns often indiscriminately punish high- and low-quality stocks, creating buying opportunities. Our best bet is that when such times come, we should be able to avoid panic and actively hunt for opportunities.

In uncertain times for the stock market, having a prudent strategy focused on the long term is critical. The winners are those who avoid emotional reactions, take advantage of volatility to buy low, stay disciplined, and keep perspective. With a level head and sound principles, long-term investors can ride out periods of decline and continue compounding wealth over their investing horizon. It's an old cliche that 'Time in the market beats timing the market'. It became a cliche because it's true.

Also read: Facts change, principles don't