Arthgyaan

Supporting everyone's personal finance journey

Markets are down but don't panic: what you should do instead

This article helps investors to choose the right course of action in falling markets.

Markets are down but don't panic: what you should do instead


03 Jul 2022 - Contact Sayan Sircar
7 mins read

This article helps investors to choose the right course of action in falling markets.

Markets are down but don't panic: what you should do instead

Table of Contents

Market falls are an opportunity

You will not make money unless stock markets fall

This article is a follow-up to our previous one on what do you do in case of market falls:

The concept here is simple:

  • do not stop investing: let your SIP continue
  • invest more in the asset class that has fallen more via rebalancing

This article will discuss how to implement corridor-based rebalancing and use it to profit from market falls.

Recent articles:
1 / 3
<p>This article uses the Arthgyaan Have vs Needs Framework to invest a large lump sum amount in your portfolio per your financial goals.</p>
How to invest a lump sum amount for your goals?
2 / 3
<p>This article shows you how the concept of indexation lowers the capital gains tax you pay when you sell debt mutual funds.</p>
Pay lower capital gains taxes for debt mutual funds: understand how indexation works
3 / 3
<p>This article lets you calculate if you should break your old FD and create a new one at higher interest rates after adjusting for premature breakage penalty.</p>
Should you break your FD and create a new one at new higher rates?

A recap on the concept of rebalancing

Rebalancing allows you to systematically buy low and sell high

To implement rebalancing, you must first create a portfolio-level asset allocation plan using a tool like the Arthgyaan goal-based investing tool that covers your main goals like retirement / FIRE, children’s college education/marriage, house purchase etc.

We will consider a typical investor portfolio with some stocks, mutual funds, and a mix of EPF, PPF and NPS investments. Say you have assets of ₹50 lakhs and a SIP amount of ₹50,000/month. Your investing plan will have:

  • your current asset allocation to equity and debt: say this is ₹30 lakhs in debt and the rest in equity or 40:60
  • your target asset allocation of 60:40

To interpret this, the portfolio has:

  • ₹20L in equity and ₹30L in debt
  • it should have ₹30L in equity and the rest ₹20L in debt (60% of 50 = 30 to reach the 60:40 ratio)
  • to rebalance, ₹10L has to be sold from the debt portfolio and invested in equity

In this case, rebalancing is being triggered since the asset allocation is to be changed by 20% points from 40:60 to 60:40. We should, however, rebalance before the gap becomes so vast. For example, a typical value called the corridor can be taken as 5%, i.e. rebalance, when the asset allocation becomes either 55:45 or 65:35 with a target of 60:40.

Related:
This article explains why rebalancing is important in more detail.

We will explore below why a 5% corridor is a good recommendation.

The impact of market fall on portfolio asset allocation

If you have ₹30L in equity and ₹20L in debt with a target allocation of 60:40 and the stock market falls 20%, your portfolio allocation becomes 30 * (1-20%):20 = 24:20 = 48:40. To bring it back to 60:40, you need to bring the equity value to ₹26.4L and the debt value to ₹17.6L by selling ₹2.4L of debt assets and buying the same amount of equity since 26.4:17.6 = 60:40. This activity should be done in one go.

Asset allocation changing with market fall

The image above shows how the asset allocation of the 60:40 portfolio changes when the market falls. At each 5% fall (and rise), investors should rebalance back to the target 60:40 allocation.


Goal-based-investing plan

Is 5% a good corridor to use?

A natural question an investor should ask is where the 5% rule for a corridor comes from. The choice is to strike a balance between rebalancing too often, which is tax-inefficient vs rebalancing too less, which leads to a loss of opportunities for profit booking.

Rebalancing signal based on market movement

As the image shows, using historical data from 1993, for a 60:40 portfolio, there are 43% of cases where there is a sell equity signal with a 5% or more corridor, but that becomes a signal that is triggered only in 24% of cases if the corridor is chosen to be 10%. Also, as the chart in the previous section shows, for the asset allocation to fall to 50:50 from 60:40, the market has to fall by 33% every two years: Markets are falling. Should you buy the dip?

Corridor-based rebalancing signal over time

Rebalancing signal over time

Here we see a chart of Nifty 50 price index data from 1993 with rebalancing triggers, for both buy and sell for equity vs debt, marked on it for a 5% corridor. In the zoomed version for the last 12 months, it is evident that investors should rebalance by selling debt and buying equity. Another thing that eagle-eyed readers should notice from the chart is that the Nifty 50 has made negative returns in the last 12 months. This observation further alludes to the opportunity rebalancing offers to buy more equity at lower levels.

The next steps that an investor should take

Using a goal-based investing calculator, identify the amount of equity you need to buy. Then, sell that amount from your debt assets (unless they are locked like EPF and PPF) and invest that amount into equity in one go. If you are not comfortable investing in one shot, do it in a few parts over the next 3-4 weeks. If your debt assets are locked, like PPF and EPF, adjust your SIP amount to be equity-heavy over the next few months.

If you are retired, you should look at your bucket allocation strategy and use this opportunity to transfer some assets from your debt to your equity bucket. Of course, this assumes you have enough in your cash bucket for the next five years’ expenses.

If you liked this article, consider subscribing to new posts by email by filling the form below.

Worked out case studies for goal-based investing

Previous and next articles:

<p>This article shows the latest as well CII value and shows you how to use it for calculating capital gains tax.</p>
Tax
How to use the Cost Inflation index (CII): latest value and historical rates

This article shows the latest as well CII value and shows you how to use it for calculating capital gains tax.

Published: 29 June 2022

5 MIN READ


<p>This article explains how the RBI repo rate drives the values of all your loans and investments and shows what investors should do to best take advantage of the situation.</p>
Portfolio Construction
Repo rates are rising - what should investors do?

This article explains how the RBI repo rate drives the values of all your loans and investments and shows what investors should do to best take advantage of the situation.

Published: 6 July 2022

7 MIN READ


Latest articles:

<p>This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?</p>
Market Movements
The stock market has reached an all-time high. Should you buy or sell?

This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?

Published: 30 November 2022

4 MIN READ


<p>This article uses the Arthgyaan Have vs Needs Framework to invest a large lump sum amount in your portfolio per your financial goals.</p>
Portfolio Construction Mutual Funds
How to invest a lump sum amount for your goals?

This article uses the Arthgyaan Have vs Needs Framework to invest a large lump sum amount in your portfolio per your financial goals.

Published: 27 November 2022

5 MIN READ


Topics you will like:

Asset Allocation (17) Basics (8) Behaviour (10) Budgeting (9) Calculator (13) Case Study (3) Children (9) Choosing Investments (28) FAQ (3) FIRE (9) Gold (6) Health Insurance (4) House Purchase (13) Insurance (12) International Investing (8) Life Stages (2) Loans (10) Market Movements (8) Mutual Funds (14) NPS (5) NRI (4) News (5) Pension (6) Portfolio Construction (36) Portfolio Review (22) Retirement (29) Review (7) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (8) Tax (16)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

This post titled Markets are down but don't panic: what you should do instead first appeared on 03 Jul 2022 at https://arthgyaan.com


We are currently at 205 posts and growing fast. Search this site:
Copyright © 2021-2022 Arthgyaan.com. All rights reserved.