Learn to invest in various stages of the market. – 1

“When one understand the difference between Volatility, Correction and Bear Market, he/she could grab the opportunity, otherwise what you think Mauka (मोका) will turn in to Dhoka (धोखा)” – Shailesh Sampat

To elaborate why I am writing this in current market situation, first of all we should understand what are the Various Stages of the market.
We can divide the Market in to 5 stages

1. Bull Run
2. Volatility
3. Correction
4. Bear Market
5. Recovery

In the market cycle nothing is forever if today is Bull Run then sooner or later Volatility, Correction and Bear Market will also be there and don’t worry Bear will also not be permanent recovery will bring market to new hopes and heights.

Your Investment strategy should also be changed according to the phase of the market just like we can not have same medicine for all the pains.First of all we will know various stages and what impact on investor’s mind-set during different market stages and what is investor behaviour in that situation.

A Bull Market or a Bull Run refers to a Stock Market characterized by a sustained rise in share prices. This occurs when investors believe the positive trend will continue for the long term. Every Investor will always love Bull run but that is the most dangerous stage of the market, if you do not respect properly it will damage your investments and may ruin financial life also. Everybody wants to buy and expecting that market will never go down. In this phase all the participants are GREEDY to grab the potential returns so the difference between price and value is forgotten and keep buying at anything. There are so many new investors and bounce back investors are starts there investment in this stage.

During all the time, whether it is Bull Run or a Bear Market whatever it may be, one thing will remains permanently that is Volatility. That is why we can not categorise this as a phase it is just a day to day Market Movement. Sometime some Impatient Investor get panic against Volatility also and overreact by selling or buying like they have lost a big opportunity.

During the Bull run all the prices are over valued in the market which is not sustainable for a long period and it gets corrected which is known as CORRECTION . In the CORRECTION phase the market prices are getting corrected against its value and bring prices in fare value zone.Sometime some Impatient Investors are getting frustrated during this phase start getting panic and starts selling.

After correction phase the actual BEAR Market starts. In this phase Investors are panic and afraid to buy stocks at throwaway price also, in this FEAR scenario there are more sellers than buyers so the stocks would be selling at cheaper price which may be the lower than its value.

Now the big question arise that how we can decide we are in which phase. We have already discussed what is Bull Run and how we can decide is it a bull run or not. But it is bit difficult to differentiate other three stages.

As per my experience and knowledge of about two decades I am explaining that When we call it Volatility, When we call it Correction and When we call we are in the Bare Market.

Volatility it self define that it will swing both ways and as said earlier that it will remain in every stages of the market. it may very from 0-10% range. If you are a long term investor then you should not react or worry about volatility.

We can call Correction if the market is dropped from 10-25% and remains at this level at least for 2 to 3 weeks. You may start buying in this phase if you are confident about valuations. Then what is the fare value and how we will calculate we will discuss some other time on this platform.

When market is corrected over and above 25% and remains at that level for at least 1 to 2 month we will call that we have entered in a Bear Market. Most Favourable Condition for Investment you can be aggressive buyer in this phase because you may get the stocks at cheaper than its valuations.

Once the market gets bottomed out prices starts moving upwards towards fair values. this is nothing but Recovery in the market.

One more stage is there in the market which is very dangerous to your portfolio which is known as Sideway Market which may be at any stage. It will always hurt long term investors because it running flat or range bound without any direction hence your portfolio will not grow and time elapse results your returns goes down. Long term SIP clients are getting maximum affected when this stage comes during Bull Run like todays. Averaging of SIPs will be ruined and even a small volatility may also turn your portfolio in negative zone.The most of the investors are not following the cycle of the market and facing the losses.Don’t swing on the wave always follow the basics of Investment.

The best strategy for investment is doing Risk Management while investing. The big question is what is the Risk? which will be discussed on this platform letter on.

In next blog we are going to discuss “The lesson of Laziness to Active Management.”

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