Advice for retail investors in a falling market

As the global economy records some of the sharpest downfalls in the history amid the coronavirus pandemic, it can be hard to believe that this may be a good time to invest in the stock market.

The Indian economy is badly affected by the pandemic that shows no sign of abating. However, if you look beyond these red flags in the stock market, there is an investment opportunity for retail investors across different asset classes. One has to be very cautious before exercising an investment option in such a situation.

Here are some advises that a retail investor can follow during such downfall in the economy:

Invest in what you know

Basic fundamentals of investing apply to such volatile market conditions too. One should invest in the assets they know and try to maintain a diversified portfolio.

You should not rush to invest in a stock that might look attractive after having fallen 20%-30% and spend some time on getting a wider picture of the company before parking your money. The ups and downs in the stock market are not permanent, the market will retreat in the coming times. Any investment decision taken amidst such downfall might not work for you in the long run, so it is recommended to monitor companies and stock market announcements before investing.

Look for red flags

It is important to distinguish between companies that witnessed their share prices dropping too much as a result of being pulled down in market turmoil and those who sold-off shares because they were facing strong downturns from the Covid-19 outbreak.

You should identify the undervalued stocks in the market and then consider how much the pandemic affects those stocks in the present or in the future. Also, the financial stability of such companies should be considered before making an investment decision.

In such a bad economic situation, the investors should also consider whether a company’s business model puts it in a better position to master the crisis, or if its prospects are extensively (or even permanently) jeopardised by a downturn.

Avoid overtrading

You should avoid overtrading i.e. excessive buying or selling of stocks in this highly uncertain stock market. It might cost you a lot to keep moving around a big percentage of an investment portfolio, since every time you buy or sell you’re usually charged trading fees, broker’s commission, and securities transaction tax. Any chopping or changes to the investment portfolio can eat all your long-term and short-term returns.

Investors should follow these recommendations before investing in the current market.

You should build a diversified portfolio with different asset classes such as equity, debt, gold and other assets that fit your risk profile and financial goals.

Even if you have surplus cash, you should consider staggering investments that will help manage risks of possible declines in the stock prices from a certain level.

The cost of the stock are reset now and there is no clue about the reset in the earnings from such stocks. It is expected that the markets might take another two quarters to decide the right valuation of the stocks reset today. So, analyse the market conditions and then park your hard-earned money in the stock market.

To summarise, do not invest excessively in equities if you are not willing to give adequate time to the economy for a turnaround. You might risk your money if you are investing with an expectation for quick returns since it is highly uncertain that how long will this pandemic take to subside and the economies to recover. So, stay safe and invest wisely!

(The writer is Founder and CEO - ClearTax)