Sadly markets do not tell you in advance ‘the next 8 months are going to be a bear phase’…so whether it is a market correction or a bear market. So how do you know how to react to a bear or a bull market?

Well lets say you started investing in 2015..and you got 12% p.a. return. In 2016 you got 16%p.a…In 2017 you got 24% p.a.

YOU are thrilled. Suddenly you thought you were a genius. The market went up BECAUSE you bought. You are now a hero to your mind. April 2018, market is down by 7%- that month, and you see red in your portfolio. For the first time. What do you do?

Read Subramoney. See why while investing in equities you should have made an Investment Philosophy Statement. http://www.subramoney.com/2008/02/secret-of-successful-investing-philosophy-statement/   That would have told you why you are investing. Read your investment diary. See why did you invest. What were your thoughts? If you thought markets will only go up..and give you 23% return REGULARLY for the next n number of years, realize your folly.

Now do the following:

1. Stay calm: When your portfolio falls by 7% in one month, your mind is telling you that in one year your portfolio will fall by 84% ..for the calendar year. Fear is obvious, panic is optional. Staying calm is a practiced art. It is not easy. The more that you LEARN to stay calm the easier it is to practice the art of staying calm. Of course it is not easy, but it has to be attempted. The fact is that few people make good decisions under stress. In order to make sure you don’t react wrongly, calm yourself first. You’ll hear plenty of traders, brokers, shouters,  and talking heads tell you to jump. Buy options, buy calls, you should not catch a falling knife, this is the time to average,…..and all of that will sound like good advice. Do yourself a favor. Ignore them. Stop listening to new traders and brokers – their experience may not be unlike yours. Yes, you may indeed need to make some changes, but you’ll be doing yourself a big favor if you proceed calmly.
2. Get your Perspective Right:  To decide where to go, you have to first know where you stand – and that means you need perspective. In April the market dropped more than 7%. But do you know that for the year the market MAY be up by 4%. Those are the vagaries of the market. Now I am not saying that you should celebrate a 4% p.a. return..but this 4% is following a 23% year, and that is fabulous. Get ready for a big fall – remember ‘reversion to the mean’ ? When you lose 7% in a month your mind does the math. Your head forgets Standard deviation. Your head forgets reversion to the mean. Your head starts blaming YOU for not exiting before the fall. Remember, you loved it when it told you “what a genius..you holegot 23%”. You took that, did you not?  Your head extrapolates this loss over the next 12 months and tells you that you’re going to lose 84% of your portfolio if this bad situation continues for the whole year.The thing is, there is no way of knowing how long this FALL WILL continue or last. You just know on 30th April that the market fell by 7% that month. It is hard to digest big losses in a very short period of time – that too for the first time. Now look at the perspective. You started the SIP for your 3 year old daughter’s POST graduate education. She is now 8 years old. Or you started these SIPs for your retirement – and your retirement is 28 years away. Do you need to worry? Through world wars, famines, panics, civil wars, atomic bombings…markets have given REAL returns superior to other asset classes. Does reading this make you calm? Learn and practice the art of calmness.
3. Take action: Sometimes doing nothing MAYBE the right thing to do. Maybe you are 3 years away from retirement and you may need to protect your portfolio. In situations such as they are right now, that can take a lot of work. It is difficult. Wondered why? Sometimes staying calm and doing NOTHING goes against every impulse in your body which is craving for safety.If your investment strategy is dynamic and calls for making changes during market shifts, you should do that. Talk to your adviser, make rules and stick to those rules. Take the action your strategy calls for. If this doesn’t satisfy you, consider doing your risk profile again. How you react is a function of the total amount you have, nearness of goals, and the age at which you are – you may panic more at 70 than you did at 32. Consider moving to a balanced portfolio – with lesser equity and lower duration of debt portfolio. Doing that can keep you calm and help you get sleep at night and allow you to reach your financial goals.Try cutting out the noise. Don’t log in every day to see the individual values. Look at your portfolio on a weekly / monthly basis. Remember to talk to people with experience.  Get a balanced view of life. If equity is 30% of your portfolio, even a dramatic fluctuation in the portfolio will not make a significant change in your net-worth. Get to some balanced reading on what’s going on in the markets. Forget the Macros, concentrate on what you can do instead.