Why do we tend to sell off during market corrections?

Indian stock markets have been quite volatile over the last one month or so, with benchmark Nifty 50 correcting by around 7% whereas Sensex has lost around 4000 points from its all-time high. The broader market has gone through much worse carnage wherein good quality stocks have fallen by more than 30-40% over a period of the last few months. Investors who have entered the market during the last five to six months are witnessing considerable losses in their portfolios.

So, is it time to sell off your positions or hold on to them? I would say, this is the opportune time to start adding to your positions. Wiser people have said, when others are greedy, be fearful and when others are fearful, be greedy, though it's easier said than done. Most of us find it difficult to cope up with the losses and tend to avoid investing when the markets are going through corrections.

Have we ever thought about why most of us sell off our investments during market corrections? Is it because we need the money or is there any other reason(s)?

We all must have taken a ride on the roller coaster; when it goes up we feel excited but feel scared when it goes down. It’s an emotion of fear that the human brain is not trained to handle very effectively.

Our mind has one basic instinct to perform; to enable our body to survive. When we come across fear, initially the mind tries to overcome it but if it continues or the magnitude of the fear increases, our mind will try to remove the cause of fear.

That’s exactly what happens when we go through the market corrections. As anything going down creates a sense of scare and feeling of fear, initially we try to cope with it saying it’s just a minor correction and things would return to normal. But as correction deepens and market voices spread further negativity, our fear factor(losing more money) and associated pain increase exponentially and that is the time when our mind finds it extremely difficult to cope up and will drive us to remove the cause of fear by selling off our investments.?

Once we have sold our investments and booked, otherwise, notional losses, we feel a sigh of relief. We no longer get affected by listening to all the negative voices as we have removed the cause of fear of losing more money.

So had we not seen the television or listened to the negative voices of so-called experts during such corrections and held on to our conviction, we would have avoided distress selling and booking losses. Capital market carnage during Mar-Apr 2020 and ongoing correction over the last few?months or so are classic examples of this.

It is very important to understand that market corrections are temporary but growth is permanent. Market corrections are always followed by astounding returns. The best phase of the Indian stock market (Apr 2003 till Dec 2007) has given 596% returns in four and a half years despite having gone through several corrections en route. The graph shows it all.

?The fall in the market is attributable to high-interest rate cycle to curb higher inflation(US federal reserve and RBI increasing interest rates), the ongoing Russia-Ukraine war creating supply disruptions, impending recession in the Western countries, and the recent phenomenon of Hindenburg accusing fraud by Adani group of companies. In my opinion, markets have just got latched on to these excuses to correct themselves from overbought positions, as there is nothing adverse on the Indian economic front. India is poised for a high growth rate in foreseeable future, due to the following factors

• Demonetisation and GST have integrated the Indian economy as one as compared to state-wise piecemeal and fractured economies five to seven years back. Continuous increase in tax collection(both direct and indirect) as a percentage of GDP over the last many months is a clear indication of economic buoyancy.?
• Networking of resources with a nationalised economy by having AADHAR, bank account for all, broadband internet connectivity, mobile, and road network. This networking helps the Government to implement policy decisions very quickly. A recent example is the corona vaccination of almost 230 crores of the Indian population in the last one and half years.
• Production-linked incentives(PLI) offered by the Government of India to various sectors to promote manufacturing.
• Lowest corporate taxation(approx 15%) in the world for newly commissioned manufacturing units. PLI and the lowest Corporate taxation would encourage foreigners to create alternate supply chains in India.
• Recovery in the earnings growth of Corporate India. The share of Corporate profit in our GDP today stands at approx 3.48% as compared to 8% during the previous bull run from 2003-07.
• GDP is slated to grow at around 6.8% during the current financial year as estimated by RBI and IMF. India is the fastest-growing economy in the world today.

Conclusion

• The fall in the market is primarily attributed to the increase in interest rates due to higher inflation by central banks all over the world. The rise in inflation is a validation of strong growth and an increase in interest rates is unlikely to stall the ongoing bull run. A classic example is the 2003-07 bull run; despite the increase in interest rates from 2004 onwards, the markets kept on going higher for the next three years. As such, the current interest rate cycle may be peaking out over the next few months.
• All previous corrections look like a lost opportunity; ongoing correction is no different, although it feels this time it’s different.
• Market corrections are temporary; growth is permanent; Hold on to your investments until financial goal(s) is achieved.?This is the time to invest in the markets and not to sell. Market performance is non-linear, that’s why investments done during such pessimism will always reward going forward. Switch yourself off from all market voices and avoid looking at your portfolio too often.
• It's futile to catch the market bottom as no one can predict it.??What matters is time spent in the market rather than trying to time the market. 90% of the gains in Sensex in the last 40 years have come only during the 90 best days.
• Start investing regularly as part of SIP as this is the only way we can invest through all the market cycles(bull and bear phases)

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