How to protect portfolio from Stock market crash?
Capital protection should be the first priority for investors. We invest in stock market to maximize overall portfolio return. Over the last several years we noticed instead of return maximization,many investors ended up with capital erosion. Specially during stock market crash investors find difficulty to protect their portfolio. However with right strategy and strict discipline one can protect equity portfolio during any kind of market crash. Implementing the strategies and discipline mentioned in this article will help retail investors to safeguard their portfolio during adverse situation.
Depending upon the quantum of stock market crash, we are dividing it into two parts –
- Minor stock market crash (Index fall by 5%-30%)
- Major stock market crash (Index fall by more than 50%)
Minor Stock Market Crash-
There are many such example where market (index) corrected by 5%-30% over a period of 1-2 months. Such corrections are part of any bull run. Like during July-August 2013 while Sensex corrected by around 14% from the recent high.(From the high of around 20,200 during July,2013 Sensex crashed to around 17,800). Current market correction (April-May,2015) is another example of such minor stock market crash.
What to do during minor stock market crash ?
During minor stock market crash it is more of discipline that can save your portfolio. Followings are the disciplines and required action –
- Don’t sell-of your entire equity holdings to re-enter at lower level. Nobody in this world can predict short term market movement correctly. So, it may happen that after your sell-off market takes U-turn and you are not able to invest at lower level. You may end up with selling at lower level and buying at higher level. Further frequent buying and selling increases transaction cost (brokerage,STT,exchange fees etc) and taxes. You need to pay extra 15% capital gain tax if you sell your holdings within 1 year of purchase. However holding your investment for 1+ year won’t attract capital gain tax. So, in short even if luckily you can time the market then also the situation is against you.
- Don’t seek answer of questions like “How long the market will correct?” During any kind of market correction if you follow analysts on TV,newspaper or internet you will find most of them expressing bearish view. The same person will express bullish view if the market starts rising from tomorrow on wards.For live example, check out the current situation(May,2015).Today Sensex crashed by around 700 points and everywhere you will find bearish view. However just 1 month ago (April,2015) while Sensex climbed UP for 8-10 consecutive days there were bullish viewpoint everywhere! The reality is it is next to impossible to predict short term market movement correctly and consistently. However one can predict long term price movement of any individual stock based on the underlying business. Based on the same one should invest in stocks while they are cheap. So, if you continuously seek the answer of “How long market will correct?” or if you try to figure out short term market movement then you will find all on a sudden market surprise you and takes a U-turn. In this regard, you can check one of our old article.Way back during September,2013 Sensex was corrected and came down below 18,000 level. There was bearish view point all over. In contrary, we mentioned that Sensex will cross 23,000 mark within December,2014. Sensex crossed 23k mark much earlier and our prediction during bearish market proved correct. Click here to read that old article.
- Don’t panic. If you can’t tolerate volatility then stop checking stock price daily. Checking price once or twice in a week will be sufficient. For any attractive investment option during stock market crash we notify our paid members. So, it is not necessary for our members to check daily price movement to invest in quality stocks during stock market crash.
- Accumulate high quality stocks during market correction. History says you can’t suffer loss if you invest in any stock market crash or any point of time while 90% analysts are in bearish view. For example, you won’t find a single person who lost money investing during August,2013 or during Oct-Dec,2008.Here we assume the person is holding his position for at least next 1 year after investing during stock market crash.
- During stock market crash investors may not have enough cash to re-invest in quality scrips. There can be another situation like, you invested a hefty sum in market correction and then again market falls further. One can’t have unlimited amount of cash to average out during every correction. In such situation the best and simple solution is to HOLD on your current position. However don’t wait to find out the bottom and then invest. You can’t buy at bottom and sell at top every time because it is also next to impossible to find out exact top and bottom.
Major Stock Market Crash –
After dot com bubble crash (during 2000-01), post January,2008 we experienced major market crash while index dropped by more than 50%.
Historically it is proved that not a single equity analyst in the world can completely save your equity only portfolio during major stock market crash. For example if market collapse by 50% (or more) then it is next to impossible to earn 20%-30%+ return from portfolio that consists only equity share exactly on the same duration. Till date not a single equity fund manager or equity analyst across the world have such track record. The reason is simple. Best swimmer in the world can’t survive during Tsunami. If atom bomb blast then it doesn’t matter how fast you can run or how well-protected is our house, you can’t save yourself. Similarly during stock market crash it doesn’t matter how well-experienced or well-qualified an analyst/investor is, it is next to impossible to save equity only portfolio.
The good news is with tweak in asset allocation and some pre-cautions one can save his portfolio even during major stock market crash.
Strategies to save portfolio during major stock market correction –
The term “save” indicates generating 5%-10% positive return from overall portfolio while market corrected by more than 50%. You can’t expect 20%-30% return while market corrects by 50%+. Even marginal positive return will be great during those situation. You need to take the following steps during major stock market crash –
- You need to sell-off your entire portfolio much before such stock market crash and seat in cash. Keeping huge cash in hand is another painful experience. For example, as per economic indicators and market data, one should sold-off his entire equity portfolio during October,2007. However from October,2007 to January,2008 bull run continued. Post January,2008 market crashed. Now, if some one sold-off his entire holding during Oct,07 he had to witness another 10%-15% up move before crash. Many investors can’t tolerate the same.For example, recently we put partial profit booking call in one of our old recommendation, Caplin Point Lab at around 1000-1050 due to over-valuation. After that the stock moved till 1350 level and now again come back around 950. We recommended to buy it at 150 during March,2014 and again around 450 level during September,2014.Click here for old article. Surprisingly few of our members those purchased at 150 or 450 are not still happy selling at 1000 because after that the stock moved till 1350. The point is you can’t exit at top. You need to exit as per rationale. After that market may move up further but sooner or later it will come down.
- You need to keep huge cash in hand for 3-4 months or more. A part of that cash can be utilized in few other asset classes. Depending upon the situation you need to re-start investing in selected stocks. A thumb rule is don’t invest in previous bull market stocks. Like real estate (DLF,Unitech) and infra related stocks gained the most during 2007 bull run. Post 2008 crash, one should avoid investing on those sectors or the stocks that lead the previous bull run.
- During the middle of the bull run (like current scenario) you need to start tweaking your asset allocation.
Do you suggest me when to sell-off my entire portfolio?
Very soon in May,2015 we are launching a special feature, first of its kind in India called “Recession Proof Portfolio”. It’s not an one-time suggestion with few stocks rather it’s a continuous process to safeguard your portfolio via tweaking asset allocation and portfolio mix-up. For example, right now in May,2015 we are in the middle of bull run that started from October,2013. So, from now on wards you need to tweak in asset allocation. Not 100% monthly investable amount in equities. Further we will guide on when to sell-off your entire equity holdings before major crash. As it is our trade secret so we can’t disclose the reasoning and logic. The feature is not live till now so don’t ask for details. Very soon it will be live for Diamond Members and you will get the details.
Do you have enough experience to handle 2008-09 like stock market crash?
“The person behind Paul Asset (Prasenjit Paul) is just 24 years old.He is in the market since 2010, only 4-5 years experience.He didn’t witness 2008-09 market crash like situation. How he can handle others portfolio during any major market crash? Are you experienced enough”
Till date nobody mentioned the above point directly. However I am quite sure that many of our members,new subscribers, non-subscribers and to some extent few competitors have the same doubt. Well to reply in a sentence –
“If a 24 years old guy can beat Sensex return by a huge margin over the last 5 years in his investment career and over the last 3 years in advisory career then he can protect your portfolio during any kind of stock market crash.” The only condition is that you need to follow that guy “as it is” and act on his every advise. If you want to mix up your own expertise then I can’t help you. So either fully follow or don’t follow at all. We care for your overall return more than you do.
The reason of being so confident – With the advent of internet, today you can book foreign hotels without visiting there. It is not necessary to visit airport to book air-ticket. Similarly, I can check the entire market data and economical indicators over the past 30 years. If you can closely monitor and analyze those data, you will find there are many similarities among major market crashes like dot com bubble crash (2000), 1991 crash and post 2008 market crash. It is not necessary to be present in the market during dot com bubble crash (2000) to analyze the situation. There are same set of economic indicators provided “Warning” signal before any major stock market crash. Analyzing those same indicators I can conclude that at present (May,2015) we are far away from 2008 like market crash. Recent correction may drag Sensex by 10%-20% from recent peak but not more than 30%. Our paid members will receive notification whenever 2008 like situation will arrive under the upcoming “Recession Proof Portfolio” feature.
Further over the last few years in my advisory business we had experienced many minor stock market crash. One such is during July-August 2013 while Sensex crashed to 17,800 level from 20,200 within 2 months. In spite of all those I believe not a single subscribers of ours suffered overall loss in his portfolio following our words “as-it-is” for at least 1 year. If there are any such investor who suffered overall loss in spite of following 1 year, they can comment under this article. Comment section is open for all.
Existing subscribers (those are for 1+ year) can also share their view on our claims compared to your portfolio return.(This article is posted on a day while market crashed badly, almost all stocks are in red.Few negative-neutral review is expected)
Update as on 15th May,2015 – “Recession Proof Portfolio” is released for all of our paid members.