Why and How to Invest in a Falling Stock Market

Markets are prone to changes and the varying degree of changes reflects in the output of a market during different times. There may be times of slump and there may be times of upward trends. What this means is that during different times, the market tends to yield different outputs in terms of profitability of a stock option. Generally, traders are scared of investing money during times when the market is falling. This happens to be more so if the general investment portfolio of these traders is favoured more on equity instruments.  In simpler terms, if one happens to be a trader who has invested a large chunk of available funds in equity instruments, falling markets will often create a panic. Therefore, there is a general fear of losing profits and the invested funds during a slump in the market. However, this is not the case entirely, as we shall see.

Why to invest?

A falling market is a nightmare for equity investors as the prices of stock options tend to spiral down with each passing moment. The ultimate fallout may seem to be very much disturbing with no respite in sight. However, if one looks at the broader picture, there is a lot that a falling market can offer. A downward trend in the market is referred to as the bear market, while the trend when the stock options are increasing in value and the market is on an upward rise, it is referred to as a bull market. The key is to understand that during a downward slump or bear market, the stock options that are going down in valuation may present the opportunity for future growth once the market revives. To understand this, let us see the following example:

Suppose that trader X has a diverse investment portfolio and has invested heavily in mid-cap stocks. If we assume that this is a bear market i.e. the market is falling sharply, then trader X stands out to lose his investment in a big way. However, let us assume that he decides to hold his ground and buys stocks of a large-cap company at low rates, as the prices are already down. He reviews his investment portfolio and decides on the best possible stock option investment course during these times. After a downward trend of a few months, the market revives and stock prices limp back to normal. What trader X has done is that he has bought stocks at prices that are way lower than the erstwhile benchmark prices and as a result of this, his returns on investment have grown considerably. If he now decides to sell off the stocks, the returns that he will get will be way much higher than what he would have got during a trade deal in a bull market. This is a prime example of why one must invest during a falling market and how it can actually help you in reaping rich dividends later on.

How to invest?

  1. Investing in a primarily lopsided manner does not soothe things out. What this means is that although when the markets fall, there may be a general discouragement of sorts about the various options that seemed lucrative just a day before, yet this does not mean that no investment option has been left credible enough. The market prices never fall in unison and therefore, some sectors inherently undergo seemingly less effects of a bear market. This makes certain options unique and rather immune to market fluctuations. For instance, FMCG stocks do not undergo the same fallout in pricings even as other stocks may underperform. Therefore, before investing in a falling market, one must keep the options open for investment in such sectors and such stocks because they provide a hedge even during times when the market trends spiral downwards.
  2. Another key for investing in a falling market is to understand that any investment in a reputed or a large-cap company represents stability in the long run. It must be borne in mind that investment in a falling market represents the long-term planning and broad term thinking on an investor’s part. Therefore, care must be taken to ensure that a majority of your invested funds form a major chunk of investment in large-cap companies owing to the general market-oriented goodwill and reputation of these companies.
  3. Equity based funds represent the risk groups among securities while investing in falling markets and generally, equity is the major area that is hit during a market slump. Therefore, it is pertinent to understand that from the very start, a lop-sided investment portfolio should not be in place. Rather, it is better to have a balanced or hybrid investment option mix, where debt and equity both form an average investment mix. Investment in debt-funds is crucial as debt funds and debt based securities have traditionally represented a safe and secure mode of transactional history. Therefore, debt funds must be preferred over equity based instruments whenever the question of investing in a falling market arises.
  4. Systematic Investment Plan (SIP) means that as an investor, you get to systematically build a sufficient and suitable portfolio using regular contributions that do not put any significant load on your surplus capital that is intended to be used for investment purposes. What this effectively means is that through the benefits of SIP, you can get to choose the regular contributions as well as a meaningful, say over the frequency of these contributions so that your pocket is not stressed. Through SIP investment, you not only reap the benefits of a disciplined investment but also choose the plan options in direct accordance of your financial goals and targets over a period of time. By the time of maturity of the plan, your accrued benefits accumulate way above your expectations, thus enabling you to have the direct benefits of planned investment.

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