Market crash: A quick guide for young investors

[K.Karthik Raja]

Market crash: A quick guide for young investors

If you are young and restless and into the stock markets then this is
for you.

For the Indian stock markets are caught in a whirlwind and you might
need a straw to hold on to something. Some words of wisdom, some
nuggets that may help you to relax, howsoever often you may have heard
them before.

Waking up this morning would you have imagined the 30-stock benchmark
index, the Sensex, would crash by more than 1,500 points after noon?

The US markets seemed a bit stable with the Dow Jones down by about
0.5 per cent. The Indian stocks too had been on a downslide since
January 15. However, the shock and awe that the Sensex witnessed today
must have made a few of the weak-hearted amongst you stop and take
heed.

Weak-hearted we all are but if you also have some patience --
considering your age -- here's what you should keep in mind to weather
stock market turbulences.

1. Start nibbling in

If you believe in India's growth story every steep fall should be seen
as a buying opportunity. If you haven't yet entered the market but
want to then tighten your belts. Market crash like the one today is an
ideal time to buy. However, since these are very tumultuous times
don't put all your eggs in one basket.


That is, if you have Rs 100 to invest then put only Rs 25 or even less
during such crashes. If you have heart for some risk then put Rs 25
out of that Rs 100 today and keep the rest for later. However, do this
only if you are willing to stake your money for at least five-seven
years. The long-term stock market story in India still looks positive.


2. Don't panic


If you are already invested in the market and are sitting on huge
losses, don't panic. The macro economic story in India led by the
consumption, infrastructure and engineering sectors still have chances
to remain insulated from what's happening in the US markets. This
because many believe that the US recession is responsible for the
current weakness across global markets.


If the US can't buy our goods, no problem. India and Indians have the
purchasing capacity believe some experts, who say that the US
recession will not have a huge impact on the Indian growth story.

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Moreover, India's demographics, skewed heavily in favour of the young,
will help India overcome external pressures in the long run. Young
Indians like you are spending more on their daily needs thereby
increasing the consumption demand.


So if you are a brave heart and believe that there are bound to be
minor hiccups along the way this is your time. Add more and good
quality stocks to your portfolio.


3. Avoid averaging


If you are a short-term trader and think that you can buy more of the
same stocks to average your buying price then you may be in for a
rough ride. Nobody knows for sure about which direction the markets
will take in the weeks ahead.


Any bad news coming from global giants like the US, Europe and China
can only have multiplier effects. If the markets were to tank further
your losses are likely to increase manifold. So book your losses and
get out of the market.


However, if you want to invest with a long-term perspective start
nibbling in on good quality stocks.


4. Don't go by tips


If you are young and eager to make money then you are an ideal target
for those who give stock tips. They will start flying thick and fast
from tomorrow. Or may have started doing rounds even today for all we
know. Some of your friends will ask you to buy stocks; some other will
advise you to sell them.

Greed = Loss at the stock market

Agreed you will find a lot many stocks at prices far lower than what
they were a fortnight ago. Check for their credentials. For this is
the time when gullible investors go for the bait thrown by stock
market manipulators. Don't buy any stock merely because a broker or a
market punter advised you to.


Similarly, there will be a host of technical advisors jostling for
your attention. "This particular stock looks weak on the charts.
Traders can make some profits by selling them now and buying the same
at lower levels with strict stop losses." Shun the thought. For you
never know when the markets will bounce back.


Bottom line: don't trade on tips. Better still don't trade at all. Go
for long-term investments. For the time being forget what Lord Maynard
Keynes said: "In the long-term we are all dead."


God knows what will happen in the long-term but in the current
scenario if you were to act on tips then you will only be responsible
for your own ruin.


5. Mutual funds are your best friends


In such times let experts manage your money if you find stock markets
to be a hot potato. Put your money in mutual funds for the mutual fund
manager is a market expert and is assisted by a big team of market
specialists. A decision made by a team of experts will help you make
far greater profits than what you will try to do on your own.


The stock market hammering of the last few days should be taken as an
opportunity to buy into good diversified equity funds. For, they put
their money into the markets irrespective of any sector, theme, or
market cap limitation.


When the markets will bounce back they will have a far higher chance
of appreciating faster than any other type of mutual funds.


6. Don't try to time the markets


As an individual you are in no way going to buy when the market falls
and sell when the market rises. Believe in investing money into stocks
or mutual funds' systematic investment plans, SIPs, regularly. This is
the only key to avoid getting ruined in the stock markets.

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The stock market crashes -- like the one witnessed today -- get evened
out by long-term gains. For instance, those who had been regularly
investing from the time markets crashed steeply during the May 2006
crash would not feel bothered about the crash today.


The market had crashed to some 12,000 points then from about 16,000
levels in just a month's time. Today even after the crash the market
was trading at 17,000 plus levels.


Remember that age is on your side. If you are in your early, mid or
late twenties then this is the right time for you to put your money in
stock markets. Historically, stock market gains have outweighed gains
from other asset classes over 10-year, 15-year and 20-year time
horizons.


Who knows, by the time you are in your 40s or 50s, twenty years from
this day, you might look back at this crash as your first stepping
stone towards building wealth for yourself and your family.