I got the following question in the Forum yesterday, and it is a great example of common investor psychology, and the need for SIPs.
With the markets losing ground, is it a good strategy to switch to Debt funds from Equity Funds? I have invested in equity funds (Reliance TOP 200 and Reliance Regular Savings Funds), I am planning to switch the investment to Reliance Monthly Income funds. Not sure if this is the right thing to do.Also, should debt fund be a part of investment portfolio?
When the market is up like it has been in the past few months, it is common for people to say that the market going down by 20% or so in a year is an expected event and you should anticipate such a thing and not worry too much about it. If you are in it for the long term then such temporary blips shouldn’t worry you.
However, when the market does actually fall by that much people forget all about the long term and either stop their investments or switch to debt funds or do something similar. This is the exact opposite of what you should be doing which is to buy when the market is low and sell when it is high.
Somehow, this is very hard to do as far as stocks are concerned. Psychologically, it is just so much easier to buy when the market is rising, and then sell when the market is falling because that’s what everyone else tends to be do.
When I look at my investments, a large part of the success has been because of taking advantage of panics and buying when the market has been low and people didn’t want to touch stocks with a 10 foot pole. If you follow me on Twitter or have been reading this blog for a while then you would see me Tweeting or writing about buying when the market falls fairly consistently.
After doing it a few times, this just becomes habit and a very useful one at that too. Please don’t look to sell off your investments when the market is going down, rather look to increase them. For young people this should be a lot easier than it looks, you have a lot longer for the market to recover and pay off.
Quite a few readers have done this here and I’d request you to share your experience on how you were able to hold on to your investments when the market went down, what made you hold on to them when others around you panicked? I’m sure there are lessons for everyone from these stories.