Four simple tips to prepare for the next market crash

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After declining in December 2021 markets recovered only to be sit again by the Russia Ukraine war. But this hasn’t dampened investor spirit.

Global benchmark indices, including the Sensex and the Nifty, are all up by more than 10%, which, truth be told is not startling.

However, with globalisation reaching a crescendo, the volatile nature of the market has only intensified.

Accepting and embracing volatility is central to benefit from the returns the market offers over time. Instead of worrying about the volatility, you must be prepared to deal with it.

Here are some tips to help you prepare for the next market correction.

#1 Keep some cash in hand

It’s a very well-known fact that timing the markets is a futile exercise. No one can predict when the markets will fall or rise.

This is not just coming from us, even some of the most successful investors believe in the same.

“After nearly 50 years in this business, I do not know of anybody who has [timed the market] successfully. I don’t even know of anybody who knows anybody who has done it.’’

– Jack Bogle

But we also know that markets don’t rise linearly. It has always been punctuated by turbulence and dips. Therefore, ​​you should have part of your portfolio sitting in cash.

The allocation boils down to your risk profile, time horizon, and how well you sleep at night (your temperament as an investor.

There is no right or wrong. What this number is, depends on you.

#2 Avoid fundamentally weak companies as now is not the time to get adventurous

As markets tumble, undeserving companies (stocks) with weak business fundamentals fall more than others.

Now, this puts you, the investor, in a precarious position. As a bargain hunter looking for deep value, you can often mistake undeserving companies for undervalued ones.

The key is to steer clear of fundamentally weak companies. Focus on companies sporting strong balance sheets with great potential at fair prices.

Such gems don’t just perform well over the long term but are built to survive turbulent times.

#3 Add to cart and wait

The top brands rarely go on sale. The same applies to top-quality companies. However, there are rare occasions when they are available at a discount. And when they are, it is time to shop!

But it is easier said than done. As every time the markets fall, you start questioning your decision. Can it fall more? Has the price of the stock bottomed out?

In all honesty, there is no way to know that as timing the stock market is a futile exercise. Therefore, the key is to not try and time the market but to judge the business and its value.

Make a list of the top companies you wish to own. They can be fundamentally strong businesses dominant in their markets, with growth potential.

Assign a value you are willing to pay for them, which is always centered around their future profits and assets. This will allow you to make the right choice in the market mayhem.

#4 Have a solid plan and stick to it

Historical patterns indicate that only sound investment strategies have withstood volatility. Be it a market peak or trough, an investment strategy goes a long way in shielding your investments.

Successful investors understand that and have a strategy that remains resilient through extreme market scenarios.

A good way to start is by asking all the right questions. Why are you investing? What is your investment time horizon? What will you do if the market falls significantly and your portfolio along with it?

Anchored around your ultimate financial goals, these questions frame your entire investment philosophy. Moreover, they prepare you well enough to act when reality hits.

To conclude

If you are saving for retirement or another goal that is years away, the time to consider how much of a loss you can handle is not during a correction.

A suitable time to accede to the appropriate level of risk along with your emotional reaction to it is when you are building an investment strategy.

As unsettling as corrections are, they are not unusual. Despite being challenging, they open up a lot of opportunities.

You can’t predict or control the markets, but you certainly can control your response to them. However, if this emotional roller coaster of investing is overwhelming, seek out a knowledgeable, trusted advisor to guide you and keep you calm.

Note: Equitymaster.com is currently not accessible due to technical reasons. We regret the inconvenience caused. Meanwhile, please access our content on LiveMint.com. You can also track us on YouTube and Telegram.

(This article is syndicated from Equitymaster.com)

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