On why people lose money in the markets

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.

40 thoughts on “On why people lose money in the markets”

  1. One of the options offered by HDFC and ICICI AMC is the SWING STP and VALUE STP which works on the principal of Value Cost Averaging. I have written a couple of article on Value Cost Averaging and then went on to explain the concept of Swing STP. Request readers to go through the following articles


    – Kapil Visht

  2. I got what you said, But how to know whether the market is higher and that is the correct value where we have to sell…..pls reply.

    1. As I said in earlier comment, if you want to buy individual stocks then you should have enough understanding to arrive at at least a rough valuation of a company. If you are just buying mutual funds then it isn’t very hard to see when the sentiment changes to panic and euphoria and usually you can test it out with any valuation number also, like the P/E multiple of Nifty.

  3. It is a true statement that buying a stock is very easy but selling it very difficult. When he is in good profit ,he is reluctant to sell and when he is in loss he doesnot want to book loss

  4. Hi Manshu,

    Really nice post! I completly agree with your views. I’m recurring huge losses when purching stocks when market is doing well. Also to with kind the stocks purchased.

    Can you please shed a light on how to come up with valuation number for any particular company/stock with an examples (taking one performing and one non-perfomring stock)? Any help would be appreciated.

    Looking forward to your response. Thanks in advance.

    1. I use some form of free cash flow analysis, I think a post on that will be good but it will take me some time as the topic is quite involved and I will need to spend many hours on such a post.

  5. I think there are two real time difficult things to handle:
    1. How to deal with under performing stocks?
    2.When to book profits in stocks which have performed well?

    Its inevitable to have under performing stocks in any ones portfolio.I have currently about 11 stocks out of which 5 are under performing …E.g Reliance @950,SBI, Infosys at some higher level..Its difficult to deal with such stocks as you can not remove them as well can not dare to add more at current levels.

    Same thing is about good performing stocks in portfolio. Eg I am holding few good stocks where I have entered at good, lower levels…like Lupin,Bata,Mahindra finance, and few others..Though I have good profit in these stocks still they are in buying recommendation from most of analysts…so no clue about the profit booking levels as well.

    1. Personally, two things guide me in making these decisions.

      For the first question, what is the reason that made you buy the company? Is it an underlying advantage, the price, or a discovery that they will make or what is it? If the company continues to go down despite no changes in that reason and no new information comes to the fore, I’m comfortable holding on to the share. But if something shows that my understanding was incorrect or some new information comes in then I sell at a loss.

      For the second part, I have a valuation number in mind, and if the company trades for higher than that for a while then I sell the share. If you are buying individual shares you should have a sense of these two things, and they will guide you with the decision of when to buy or sell.

  6. To the original post and all comments and questions:

    1.proper asset location will take care of everything by itself. and it is not just your MF portfolio or stock portfolio.
    2. Buy when there is blood on the streets, bad times make for good buys.
    3. read the pink papers and personal finance blogs only once a month

  7. Hi Manshu,

    Read ur comment above on large caps returning better than mid & small Caps. It would be really gud if u can find link to tht article.

    So is it that even for long term goals like say 15 yrs away , one shd stick to large & midcap funds than a mid-small cap fund??

  8. Dear All,
    It seems really difficult to hang on. I am investing from past 5 years in high rated div. eq n large cap. but what I find is that returns are less compared to a post office RD. I dont understand long term is how long?
    for example – for last 52 months 52000/- is at 58000/- as on today in HDFC Top200.
    for last 48 months 48000/- is at 48700/- as on today in Reliance RSF-equity.
    for last 25 months 25000/- is at 25113/- as on today in DSP BR Top 100 equity.

    I am saving for my Retirement. Anyone please advice should I keep investing or checkout. I am 28 yrs. old.

    1. Dear Sushanta,

      I am not any expert on this topic. But wht i feel is u really have time on your hands. U r just 28… so keep investing in MF’s via sip’s as all experts ( Manshu) advises. I feel u shd also take some expert opinion on the selection of your funds. HDFC Top 200, though one of the best, is now really having a large AUM. So tht’s probably hampering its performance….

      And please dont compare this to a RD. This is going to be totally tax free in ur hands in the long run. And this is for your retirement- so dnt worry…

      For the rest , Manshu’s here to help us… !

  9. Manshu,
    I agree with you completely ! I have seen the benefit of being long term with the market and also seen short term loss scenarios.

    I just felt one thing though looking at the market from last 2-3years is the inconsistence in the market, goverment policies and CAG and other factors making people think otherwise about the market and move to debt and secure funds.

    Although, I completely agree to stay put is the best scenario from long term perspective. The best way to do so I have been able to do is not look at the profit/loss column too regularly, as that is one column which drives the emotional decision rather than logical decision.


    1. Hi Amit,

      We have gone over this so many times over the years now, and the one thing I’ll add to you what you’ve said here is that the inconsistency will always be there and has always been there around the world.

      In the last few years the Indian government has done its best to run the economy to the ground and they have more or less succeeded in it and the stock market shows that. But I’m sure that even if the government made good policies, the markets will still be volatile and have its ups and downs which is the nature of the markets.

      It is for a smart investor to benefit from this volatility, and not be afraid of it.

  10. @ harineem : Yes I burnt my hands in KFA.. 15rs i bought 1000 shares..Sold at 12.9 .. so i am glad now i made that call becuase it is now hovering around 4rs…

  11. Even debt funds like HDFC Prudence and MIP returns are down. All of us want to buy when its low but how low or when is the question? Also picking the winner requires skill, effort and a bit of luck. Like Satyam case some people made a good call but people who expected similar comeback for KFA are burnt badly.

    1. I didn’t mean turnaround stocks in this context, I meant increasing exposure to equity overall when the market sentiment is bad. Increase your exposure to equities in general and not so much rely on stock picking skills.

  12. Yes i Love to do buy units when market is going down.Few days when market went down(500 pts) I invested rs24K in my ULIP.

    But i do not know how much maximum shd be invested..I think we shd do in few cycle.Put some money and then wait for some time and in market goes further down then again put some money..

    Is my understanding correcT?

    1. Hi Yogesh,

      Yes you’re saying exactly what I said in a comment above and follow myself. I ensure that I have some cash always and that if the market falls further I can increase my investment. And it is always staggered, never all at once.

  13. Well.. I bought 1000 Satyam shares when it was at Rs. 26 (Immediate after Satyam scandal)… Only regret is I didnt buy when it was at 14Rs. Still have them… 4 times profit and now I will actually get TechMahindra shares at 8.5:1 ratio.. In all 117 TechM shares at 26000..

    1. For this post, I didn’t mean individual stocks that were turnaround candidates but rather investing in the broader market when the sentiment is really bad, and everything is down.

  14. The only rule to make money in market is what you have highlighted and repeated several times by all who understood. ( some one who was a college dropout, un professional…. said “be greedy when others are skeptical and vice versa )

    I would love to see you do a comparative analysis of the sensex / midcap / smallcap for say 20 years and I believe you will find some interesting pattern too to follow in investing during the market cycles… 🙂

    1. I have done a comparison, which I believe was for the funds and found that small caps tend to fall a lot more than mid caps and large caps, and on the whole large caps have returned a lot more over a longer period of time. I can see if I can find the link to that old post.

      1. Hi Manshu

        what I found was the blue chips fall slowly in a correction hence continue buying those in that phase. Buy small cap and mid cap heavily only when market is in uptrend because they tend to outperform only after the blue chip has gone up considerably. this way the downside is minimized of your portfolio and the upside is maximized and you can really get a feel of this by following this for a complete market cycle which had all possible phases. Hope you got my point.

        1. But Shinu along the same lines, why not buy small caps heavily in the downtrend so that you can own a lot more units when they eventually do turnaround?

          1. The small caps tend to fall much heavily (say 50%) than the mid caps (may be 40%) and much more than the blue chips (if 30%) but at the same time the recovery is much slow in small caps than mid caps or even slower than blue chips. So the bottom fishing is more possible in small caps and the possible payback is much greater than the mean or the indices with patience if you are ready for the full ride in the next upswing which should happen one day in….

              1. Hi Manshu,
                Continuing on a thread that has been dormant for a while. I enjoy catching falling knives. Actually in August 2013, I ran out of more funds to invest. As a last resort, whatever I had in large cap funds I sold and re-invested in Small cap and Microcap funds along with Sector funds. Today, in 6 months, the average returns are about 36%. I feel the more negative the outlook is, one should shift more into riskier portfolio to benefit from the gradient of drop in riskier sectors and smallcaps which reflects on subsequent returns.
                If one does a point to point returns from the August dip http://www.valueresearchonline.com/funds/h2_point2point.asp?start_date=30-Mar-2013&end_date=29-Mar-2014&acode=&ocode=&type=&Vriskrating=&nasset=&investment=&pbut=Get+Data
                it is evident that these small and microcaps had the best returns but to enter them, it requires a bold step in an uncertain market.

                1. Congratulations on your gains, and I wish you many more gains in the future. I have no doubt that this six month period has proved profitable, and if you have the discipline and good fortune to continue to catch falling knives you will make great fortunes for yourself.

                  The only word of caution, and that’s why they are called falling knives is you don’t know when the fall starts, and if in the next six months, the market begins to fall then the smaller stocks will be the ones to take a bigger hit, and the gains will turn into losses.

                  So, I’d say it is great that it worked for you in a six month period, but six months is hardly anything to go by in the market.

  15. Hi Manshu,

    I totally agree with you in terms of market investment but now a days I see lots of people asking questions about switching stocks.
    When you think about switching your investment from one stock to other stock then you should look at whole different kind of parameters and your strategy should be different.
    e.g. If someone ask me should i exit from suzlon and enter to some PSU banking stock which has also fallen a lot, I would say yes…. I will not even advise to average such kind of stock where fundamentals are shaky and you are looking for long term investment.
    on the other hand if someone ask me similar kind of question about TataSteel… I will definitely advice the person to stay invested in them or to average out if possible.

    Obviously its just my opinion, its totally possible that suzlon may rise more than any PSU stock or any metal stock.
    In short within stock market as long as you are invested in mutual funds you should not panic with market fall…. but when you are directly investing in stocks its always better to do proper homework 🙂

    1. Hi Arun,

      Yes, direct stocks are totally different and can move differently from the broader market and you should know why you invested in a particular stock and if those reasons no longer exist or if the valuation seems richer now then you should exist.

      So, yeah to that extent I don’t think anyone should keep averaging down just because a share is falling down.

  16. What u say is very correct… Trying to follow it, though at times it becomes difficult to convince oneself and one’s parents…SIP’s the best mode I guess…
    My query is – during falling times, can one invest surplus in as a lumpsome too?? May be staggered STP’s in the same fund??

    1. I feel it is always better to stagger instead of do a lumspum at one go because you never want to be in a position where all your cash is in the market, it is still going down and you have nothing new to invest. If you have a lumpsum, stagger it across 12 months or 14 months.

      This is what I have done and I can tell you it is a lot better for your nerves than just going all in at one go, and watching it go down without having the resources to add more investments.

  17. I have ULIP policy in which there is facility to transfer funds from equity to debt or debt to equity.

    So what I do ..When market fails i transfer my units from equity to debt & purchase new units in equity.. after some time i again transfer units from debt to equity..

    1. So if I’m reading correctly, you do increase your equity exposure when the market falls, correct? Any parameter on when you do this? I mean there are several ways in which one can describe a market fall, how do you define it, and what triggers your switches?

  18. Agree with you completely. Theoratically correct, but practically diff. to implement, buy stocks or hold on to it when the markets are falling – the fear of losing more than what he or she has already lost notionally.

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