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Investing 101:

Investing in the Market and Market Corrections

So you are an investor who is waiting for the market to take a correction before investing. It’s always tempting to wait for a dip before entering the market. But here are some facts that might encourage you to invest before the market starts to tumble.

  • Corrections are temporary: While corrections in the market occur frequently, yet they are only temporary. When the market starts to go down, it doesn’t mean that it will stay there; it will turn around and start rising again. This is how the Capital Market works. So even if there is a downturn in the market, it will eventually rise again, enabling you to ride through the trough of the market unscathed.
  • Staying out of the market is not prudent: Keeping yourself out of the market may be more harmful than being invested in the market even if the market is going through a slump. This is because if you invest for the long term (e.g. for a period of 10 years), then whether you entered the market at its low point or high point or at any other point in time, you would still be earning something (for example: through periodic dividends and other payouts, depending on the stock-picks in your portfolio).
  • Timing the market may be counter-productive: Timing the market may be counter-productive because it is nearly impossible to time the market. While you are waiting on the sidelines to invest when the time is right, you may realise that you have lost precious time during which you may well have been invested in the market to get returns, dividends or capital gain from the market
  • Taking emotional decisions is disadvantageous: You may be tempted to take emotional decisions which may be reactive to the market situation. This reactiveness is usually the result of rumours in the market or an effort to time the market. These emotional decisions could lead to pre-mature divestment from the market or waiting on the sidelines for a long period of time before investing in the market. In either case, you may be at a disadvantage because the correct course of action is to stay put and not make any emotional decisions. For this, you may well be rewarded by the market in the long term.
  • Investing prudently is all you need: By investing prudently, you are able to ride the wave of the market, and come out safe and sound. For example, if you invest in stocks which have a high dividend yield, then you may as well stay invested in the market even during a downturn, earning dividends while staying put in the market.
  • After a correction, the market makes a rapid up-swing: Once the market takes a dip, it makes a rapid come-back. So if you think you will wait till the market stabilizes before investing, you may well have missed the rally. Therefore, it is a good idea to invest in the market at any time you deem fit. You do not have to wait and see till the market goes up or down.
  • Corrections differ from a bear market: Corrections are all too common in the market movement and are a healthy sign of a good market. On the other hand, a bear market is when the market takes a correction of 20% or more. The bear market usually lasts much longer than a correction. In either case, as advised earlier, it is better to be invested in the market for the long term than for the short term.

In conclusion, we can say that no matter what the market movement and its corrections, it is better to invest prudently and avoid reactive decisions while being invested in the market for the long term.