Market crash – should I sell my stocks?

Courtesy: Zadeus from Flickr

At the time of writing this, the markets have fallen by more than 1500 points from the high of 21,005 reached on 5^th November 2010.  That’s a drop of 7% in 20 days.  The euphoria has turned negative with news of sovereign debt problem in Ireland, tension between the two Koreans neighbours, bleak outlook for micro-finance institutions and yesterday’s housing scam involving top officials of public and private sector companies.  To be fair, 7% fall in the backdrop of phenomenal increase in 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 recent fall.  It appears that he had made significant investments in selected equity stocks just before markets started falling and now he is in substantial loss in just couple of weeks.  The main point of worry is these were his short term funds which will be required in two months.  He was lure by the tip given by his broker about a sure shot profitable trade on these stocks within one month.  He is now confused as whether to sell this investment fearing further downside or to stay invested hoping 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 recent reduction in value of your investments?

Well if you have followed 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 night during such times.

1. One should invest in equity markets taking a long term view.  In case you want to purchase a car in few months or planning to purchase a home in 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 the equity stocks.
3. You should never make lump sum investment in equities.  Always spread your investment over a period of time with periodically investing a fixed sum. Ever tried a SIP in 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 advices given by broker for immediate or sure shot profits.  Remember there are no shortcuts in life.

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

So in which category do you fall?  Do share your views in the comment section below.