What should you do in a falling market?
So, what’s a stock market investor’s best response to dropping stock prices?    

First, forget about rationalizing and explaining (or listening to other
people explain) why stocks are falling. It’s a pointless exercise at best, and misleading at worst.

  • Second, file the painful experience away as a worthwhile reminder of the riskiness of stocks, and draw on that memory during the next market boom when optimistic market seers tell you that stocks are really not risky (Remember Sensex 25,000).
  • If you believe, based on your preferred market measure, that stocks have overcorrected, don’t wait for the correction to end. Investors who wait for final and complete confirmation that the market has turned around invariably miss the bulk of the turnaround. I was investing in 1997 through 2006 – it had nothing to do with the equity markets. It was a conviction that long-term monies should be in equities. So, if I have long-term money, it goes into equity, other wise it goes into a money market mutual fund.
  • Recognize that even if you are right about the market overcompensating for past mistakes, there will be months of pain before the gain. Being a contrarian is easy on paper but much tougher in practice.
  • Markets will go up and go down – you cannot change that. You can change the way you look at it. When you have money you will invest, when you need money you will sell. There is no call to action based on ‘what the market will do’. So that does not matter.
  • Finally, console yourself with the recognition that the professional portfolio managers and the market experts you see on television are staring into tele-prompters not crystal balls. 

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