The stock market was down by more than 30% from the previous high. People are still panicking because this is just a start for Coronavirus in India and can lead to huge financial crises. The number of cases are increasing significantly throughout the world. Although government and central bank has started taking measures for it because the impact is highly predictable. We still don’t know if this could lead to a recession or it’s just a market correction. While others are busy panicking and buying groceries, the future millionaire would think of this as an opportunity to earn super normal profit. Hence, what’s the smart strategy for investing during a recession?
Poor and middle class people are usually busy with the underlying reason of a recession (like buying groceries, talking to relatives, gossiping, reading social media memes, etc). While rich people or future millionaires are usually busy analyzing stocks and taking a call on which one to buy.
Gold price goes up before the recession kicks in. Its a foolish move to buy gold during a recessionary phase because they don’t provide any utility and offer very less return as compared to stock.
So why is no one buying stocks during a recession?
Why do stocks sell at so lower prices, when people know its a great opportunity to buy during these times? This is simply because nobody knows the exact bottom. Everyone is waiting for a few good signs and they’ll start pumping in more money when the market looks positive for a few days.
This is the reason, in many cases, the market bounce backs in much faster pace after a crash. As the history tell us, Sensex hit two upper circuit in one day after 2008 recession (when the Index went up by 10% in a single day and the trading was stopped for sometime). Remember, this is Index, not just a stock.
Waiting for these moments could be too late. Investing now may sometimes be too early because you can’t buy something that’s overpriced. Hence, How do we approach a situation when the market is falling and what should be the next step from here?
Situation 1 – The market will recover before you realize it.
Situation 2 – What if this time it’s different? (the most dangerous words in wall-street). The market might go down even more leading to a crash.
If it’s the situation 1, then you’ll probably not have to worry and I’m sure you’re not reading this post for it
Let’s come to real discussion about the situation 2
Whenever there is a sharp decline in the market, there is a human tendency to sell now and enter later. (To make a profit out of this situation). After reading so many books and blogs, you might think. “Oh, I think I need to ignore these short term fluctuations and just focus on long term goals.
But when the market declines even more, you start regretting, what if I had sold this stock and bought at this new lower price?
Even though it’s really difficult to identify how the market would behave in future (not even serious economists or analysts can do it), let’s say you predicted the fall precisely. Which means you probably sold the stock at high price or going to sell now and the market will decline even more. Superb!
The biggest issue in getting out (selling off the stock) is to again get back into equity markets (buy at lower price). Even if you are right the first time, to get back in, you need to be right twice. And while we imagine the equity market trajectory to be a simple straight line either going up or down, there are too many false upsides during a fall.
This fools you into complacency (read as “I have seen these temporary upsides before. It will fall again. I will wait”), and when the actual recovery happens, you think it’s yet another false start and by the time you realize this one is the real one, it is usually too late and you might end up buying the same stock at higher price than you sold.
As long as you believe in this core understanding – the simple answer remains :- ‘This too shall pass!’
Let me give you a hint to identify the exact bottom of any bear market or a recession. It is when people are hopeless. The sentiments are shattered and everyone is only being pessimistic about future. That is, the time to enter the market (if you want to make super-normal gains). However, more than 99% are busy worrying during that time.
“Not everyone have the ability to swim against the tide. It needs a lot of (mental) power. Once you learn it, you’ll enjoy it.”
Hence, I present two strategies for you here:
1. The Conservative Strategy
The strategy would be to simply add funds in frequent interval. For ex., if you have decided to invest Rs.2 lakh in stocks then you can invest a part of it now. Set up a weekly SIP or even a daily SIP. If the market falls and reaches to new low, then you can invest a little more and take position in different time periods. So you’ll have an average price which will not be too high or too low. It hurts a lot when you’ve just invested few days ago and it’s value is down by 15%. If you invest completely at once and if the market goes down by 10%-15% then you’ll not be able to take advantage of the new lower price. And you’d probably think why did I enter so early?
On the other hand, if you just wait for the market to fall more, you might see that the market has already gone up and the golden opportunity is lost. Recessions are not common. Although there is no fixed pattern, however they probably happens once in a decade or so.
You should never stop your SIP for mutual fund during these times. You can click here to read about the magic of SIP during a recession. Alternatively, you can top up your Mutual/Index Fund portfolio with lumpsum using the same strategy that I mentioned above.
2. The Confident One
If you’re a person like me who have already done a thorough research on few good companies and have held their stock for a long period. Since you already know the business then you can have more of it now. All at once anytime during the recessionary phase.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”Warren Buffet
Call your broker or go to the App and do the trade. Because I’m assuming you’re planning to hold this stock for a very long period and it is currently selling at very cheap price. 10-20% drop in few days won’t matter in 10-15 years. Because you’re probably not looking for % profit but multibaggers. The power of compounding will and always works on your favor. Time in the market always beats timing the market. That I think is not only smart but the best investing strategy during a recession.