A crashing market shows what kind of an investor you are2 min read . Updated: 24 Aug 2015, 09:06 PM IST
The reaction of people to a stock market crash is a function of their individual personalities, say financial planners
As China’s benchmark Shanghai composite index tumbled by 9%, the S&P BSE Sensex plummeted 1,000 points—it has been able to regain 100 points so far. There are palpable concerns over China’s economy and this concern may also grip retail investors.
“Every swing in the stock market is driven by fear and greed. Fear starts with big investors and then spreads like an epidemic forcing others also to panic and not investigate the cause," said Dr Rajendra Barve, a mental health professional and a researcher in behavioural economics. “Investors who get caught in this panic cycle don’t really look at logic and base their decision more on emotions. They sell because they want to cut their losses and that’s the manifestation of greed because they didn’t achieve what they wanted and want to avoid a big loss. Investors adopt a herd mentality and don’t really go by wisdom," he added.
The reaction of people to a stock market crash is a function of their individual personalities, say financial planners. “This has nothing to do with income or age, it’s just about the mental make-up of the investors. And we have to keep reiterating to them that unless there is something fundamentally wrong, they shouldn’t panic and keep a long-term focus," said Suresh Sadagopan, Founder, Ladder7 Financial Advisories, a Mumbai-based financial planning firm.
But not all investors call their financial advisors out of panic, some are beginning to mature and are quick to sense opportunities. “The calls I have got since morning are all from investors who sense opportunity. There are clients with big-ticket portfolios who want to buy more and then there are clients who had been waiting for the right time for their pending equity deployment. Right now there is no panic, but if the markets touch 24,000-25,000 levels, there will be panic and at that time we will have to explain the long-term perspective of the stock markets and the buying opportunities," said Mukesh Jindal, partner, Alpha Capital, a multi-family office.
On a day like today it’s important to take stock of your goals, understand the role of equities in achieving those goals and not let stock market cycles panic you. “It’s important to calm down, be clear about the objectives with which you invested in the market and understand the long-term nature of the stock market. In fact, retail investors should consider mutual funds for their equity investment as it will help them float longer in the market," said Barve.
In the end, it’s the basics of personal finance that will hold you in good stead: don’t lose sight of your goals and use equity investments to fulfil long-term goals.