Market Down – Should I Sell My Stocks?

By Vishal Shah (25^th Nov 2010)

At the time of writing this, the markets have fallen by more than 1500 points from the high of 21,005 reached on 5th November 2010. That’s a drop of 7% in 20 days. The euphoria has turned negative with news of the sovereign debt problem in Ireland, the tension between the two Korean neighbours, the bleak outlook for micro-finance institutions and yesterday’s housing scam involving top officials of public and private sector companies. To be fair, a 7% fall in the backdrop of the phenomenal increase in the last two years can hardly be termed as significant. Yet, the retail investors’ restlessness has increased.

Yesterday while travelling in Mumbai local, I overheard a traveller chatting with his colleague about the markets. He was worried on account of his recent fall. It appears that he had made significant investments in selected equity stocks just before markets started falling and now he is in a substantial loss in just a couple of weeks. The main point of worry is these were his short-term funds which will be required in two months. He was lured by the tip given by his broker about a sure-shot profitable trade on these stocks within one month. He is now confused as to whether to sell this investment fearing further downside or to stay invested hoping the market to recover and exit when he recovers his notional loss.

Are you also in the above category of investor? Are you as a retail investor concerned about the recent reduction in the value of your investments?

Well if you have followed a few fundamental principles of investing, then you will not be in the same situation as my fellow traveller. Here are the principles which will not let you have sleepless nights during such times.

1. One should invest in equity markets taking a long-term view. In case you want to purchase a car in a few months or planning to purchase a home this year, then you should not invest that amount in equity markets. Better to stick to debt funds and fixed deposits for such short-term tenure.
2. It is always advisable to invest in mutual funds rather than directly into equity stocks.
3. You should never make lump sum investments in equities. Always spread your investment over a period of time by periodically investing a fixed sum. Ever tried an SIP in a mutual fund?
4. Keep your investment plan in line with your long-term goals. It is always prudent to stay within the allocation range suitable for your investment goals and horizon.
5. Do not worry about short dips like this. In a larger frame of your goals, it is not of much relevance. You should not worry about it so long as you are a long-term investor.
6. In case you are nearing your goal target, start booking profits periodically in your equity investments and shift to debt funds.
7. Do not listen to any tips or advice given by the broker for immediate or sure-shot profits. Remember there are no shortcuts in life.

If you have followed the above principles, then at least assure you are on the right path and should not be concerned about the market movements every now and then.

So, in which category do you fall?