Five steps to protect your portfolio during a stock market correction

When equity markets correct, the trickle-down effect can be felt across the board. Overall investible surplus reduces for other assets as well once gains from equities get wiped out.

Consumption expenditure around things like leisure travel, wedding excesses and the likes also tend to come off when returns from equities are not positive for a prolonged period.

This happens because people do use equity gains as passive income to spend on the additional wants that one may have. Moreover, for the broking and trading community at large, corrections spell a lowering of even their active income.

What about the average retail individual investor? Do equity market corrections matter? Yes, they do. What starts out as a correction, may well turn into a bear market that lasts for a few months or a couple of years. Currently for our domestic equity market, short term market uncertainty can very well turn into slightly more medium term pain given that there is a large change looming over the global economy.

With the return of Donald Trump as the US President, there is a lot of speculation about what this will mean for the global economy and for the US dollar, which has already rallied a fair bit in anticipation.

A strong US dollar spells risk for the Indian economy as we are net importers of one of the most important commodities, crude oil. A higher import bill for crude oil itself could mean potentially higher domestic inflation. The direct impact aside, there is also a lot of speculation around trade policies, both towards India and other countries, geo political changes and so on. Add to that our internal economic problems owing to weak domestic consumption and slow rate of private capital formation, which have already impacted GDP growth negatively. Thus, risks are rife.

Unfortunately, all of this is way beyond yours and my control. Factors that impact the economy, however, also have a bearing on the equity market sentiment. Currently, this is veering towards pessimism. Also, let’s not forget that the last nine calendar years have been a one way street up for equity benchmark NIFTY50, five of these years saw double digit gains. Thus, some amount of mean revision may be expected.

Question is, after years of gains are you prepared to absorb red in your portfolio?

How to be prepared for a prolonged equity market correction?

So far the benchmark index NIFTY50, is down 13% from it’s peak of around 26,000. That’s already putting the NIFTY50 in firm correction zone. Could it go lower? Given the risks we spoke about earlier, the chances are high. Should you exit now and save further losses? Answer is no. Equity markets undergo interim corrections, but in order to gain form the bounce back, you need to remain invested. Sample this, had you exited after the 23% fall in March 2020, you would have realised those losses, but missed the 14% gains in April 2020.

It’s unlikely that you will be able to predict the volatile turns of the market accurately and along with that move in and out of equity investments with the agility required to capture the highest returns, while skipping the draw downs.

Hence, it’s wiser to prepare yourself in advance.

Lastly, never forget that you do not have control over asset prices. Any asset price be it equity, real estate or even gold can behave the opposite of what you expect it to. What you can control is how much you save and invest regularly. What you can control is your ability to expand your earning capability. These are the true drivers of compounding in your portfolio; higher proportion of saving and consistent improvement in your income. Don’t rely only on what you expect your investment to deliver. If the kitty keeps growing thanks to regular refills, then compounding even at lower overall return will result in a substantial benefit.