Whether you’ve just started your financial planning journey or whether you’re an experienced traveller on the route to financial independence, a market correction affects us all. Market corrections, characterised by a drastic decline in the price of a security from it’s most recent peak, are like boss fights in a video game. While it may leave you bruised and drained out, overcoming a market correction will always lead you to the new level.
As we’d discussed earlier, preparing for a market correction and knowing what steps to take when it happens are of utmost importance to your financial stability. With a little help from your personal financial advisor or wealth management firm, you can build a solid portfolio that can withstand the destructive potential of a market correction.
The fact of the matter is, after every market correction that India has seen over the last decade or so, the market eventually stabilizes, and in most cases, yields great returns for those who were prepared and worked their way around it.
Here are a few Dos and Don’ts that you should keep in mind to keep your portfolio safe and sound during and after any market correction.
Things to do to overcome market corrections –
- Set Your Money Goals
Without a solid set of financial goals, there’s no way for you to understand where and why you should invest. Without clarity on this matter, it could become quite difficult for you to figure out what steps you should take during a market correction. Our advice would be to sit down with your personal financial advisor and clearly define your financial and life goals before you start investing. And once you’ve got them noted down, stick to them. This is the first rule of being prepared to deal with any market correction.
- Manage Risk Through Insurance
Get yourself insured at the earliest. Not only does this allow you to get lower premium rates, it makes sure that in case of unforeseen circumstances, you always have an extra layer of financial protection for yourself and your family. This way, even if a market correction adversely affects your ROI, it won’t affect you and your family in times of need.
- Maintain An Emergency Fund
Even if you aren’t preparing for a market correction, setting up an emergency fund is one of the best financial tips you can get in this day and age. The logic is quite simple; much like insurance helps you mitigate the cost of specific expenses, an emergency fund can be used by you to cover any costs, even for commodities and services not covered by insurance.
- Focus On Asset Allocation
Getting the right asset allocation in place is one of the first steps towards a fruitful long-term investment plan. Depending on the type of risk you’re willing to take, work with your financial planner or wealth management firm to get an idea of the type of assets you should be investing in.
If you’re comfortable with dealing with a volatile market, you could invest into instruments like equity mutual funds or direct stocks. If safety is the criteria then fixed deposits, Govt. schemes like the Public Provident Fund and debt mutual funds are a smart choice. However, don’t put all your eggs in one basket. No matter what type of investor you are, your portfolio should have a good blend of such investment vehicles in order to minimise the loss of ROI due to a market correction.
Things you shouldn’t be doing if you want to survive a market correction –
- Put Your Wants Before Your Needs
Quite simply, don’t ever bite off more than you can chew. Investments aren’t a game, and there is no tried-and-tested formula to help someone make money. Even if your investments are doing well and you are receiving good returns, do not use them to finance your desires for things you don’t need or can’t really afford. It’s always a good feeling to know that you have more money to spend, but that doesn’t necessarily mean that you have to spend it.
Always keep the end goal in mind and don’t be swayed or tempted to make decisions that may satisfy you now, but end up putting you in a sticky situation later.
- Let Your Money Sit Idle
Perhaps the biggest mistake any income-generating individual can commit. The whole point of creating a financial plan is to put your money to work. If you’re letting the money collect dust in your bank account, you’re doing yourself a grave disservice. Factor them into your investments as well or see if you can make increase investment and prevent your money from lying stagnant.
- Get Emotional About Investments
We have good days, and we have bad days. So does the market. Sometimes the bad days can seem to last forever, but like everything else in life, they too come to an end. Don’t let your feelings get in the way of your investments, that is not a good combination at all.
Get Swayed By ‘Market Trends’
No one can predict the market, and you should stop trying to do so as well. Your priority is not purely just to make money. It’s about having the right amount of money at the right point of time. Don’t spend your time trying to decipher what the ‘experts’ are saying. As mentioned above, build a robust financial plan and stick to it. Don’t look at short-term high-return investments with wide eyes and forget that there is a bigger picture to look at; your personal and financial goals.
- Regularly Review Your Plan
Yes, we have been telling you to create a financial plan and stick to it. However, these plans are dynamic. What this means is that you can’t build one financial plan and keep making the same investments year after year for the rest of your life.
As life goes on, you will go through a host of changes like salary hikes, promotions, relocation, and the birth of a child. At each stage, your plan should be flexible enough to let you seamlessly move into an investment mode that helps you achieve your new goals. Similarly, it is good practice to periodically review your plan with your personal financial advisor and see where you can make changes in order to get the most out of the investments that you make.