How to plan for a future stock market correction?

Over the past few months, I have spoken to numerous investors who have moved their investments to safer options like fixed deposits, bonds, and cash. In fact, it appears that more investors are waiting for a stock market crash than ever before.

A harsh reality of the market is that consensus almost never plays out. In fact, if you go by historical evidence, high cash levels across portfolios are a precursor to an upcoming bullish advance in the market.

Further, Indian markets have a unique characteristic. They recover fast. Below I have compiled the past 10-year data for every time, the market fell over 10%. Typically, markets completely recover between 1-6 months.



There are two takeaways from studying the above data.

First, corrections are temporary and short lived. Market corrections cannot be predicted and the best way to compound money over time is to stay invested. It is pointless to wait for market corrections.

The recent market fall amid election frenzy echoes a familiar trend.

On 31st May - Nifty closed @22,530.70

On 3rd June after the exit poll numbers - Nifty went up by 3.35% closing @23,263.90

On 4th June, after the election results- Nifty was down by 5.93% closing @21,884.50

On 5th June- Nifty went up by 3.36% closing @22,620.35

On 6th June- Nifty went up by 0.89%, closing @ 22,821

NET EFFECT = FROM (4th June – 6th June) Nifty is up by over 4%

In short, in the long run, everything evens out.

Further, considering all the macro and micro factors, India is one of the most promising markets in the world right now.

The economic environment in India is most suitable for a long-term bull market cycle even if there will be corrections along the way. Some of the factors that support this view —

1. Fastest growing major economy, with GDP growing at 7-8% p.a.

2. Favorable demographics. India will have a young population pool till mid-2025

3. Inflation is within RBI’s target of 4% (with a leeway of 2 percentage points on either side)

4. Tax collection (direct + indirect) stood at Rs 39.5 lakh crore, growing over 14% over the previous year.

5. Rs.2.11 lakh crore dividend by the RBI to the government will lead to increased capex and help reduce the government's fiscal deficit for FY2025.

Second, not only are market corrections short-lived but they often happen after markets have already risen beyond reasonable valuations. Even after a correction, stock prices may not fall back to the levels at which you sold your stocks.

This is because overvalued markets become a lot more overvalued before they correct. In my view, given the high levels of cash across investor portfolios, any dip will be quickly bought into.

The stock market will help you build wealth over many years. If you try to make a quick buck in short term trading, you are more likely to suffer a loss sooner or later.

It is impossible to predict how the markets will perform over the next few weeks or months. Just stay the course and you will certainly compound your money at a rate much faster than traditional fixed income investments.

Consider this — the biggest crash witnessed by the Indian markets in the past three decades was in 2008 when the Nifty fell over 60% from 6,287 points to 2,524 points.

Those who invested in the Nifty index at its peak of 6,237 just before the biggest crash in over three decades would have compounded their wealth at 9% if they stayed invested.

(The author is the founder CEO of Sana Securities)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)