Relief rallies in a falling market can be extremely deceptive. They give us a false sense of confidence. They are sharp, swift and sudden. They take us by surprise and excite us enough to believe in the strength of the market. And, when we begin to believe that these relief rallies are for real and here to stay, the markets fall again.
We are going to see this trend play out across markets, domestic and global. Investors must prepare themselves for such a market phase. Trading fearlessly in such a market and engaging in excessive speculation will potentially expose investors to permanent loss of capital.
Investors must learn to differentiate a market forming lower tops, from a rising market. The most expensive parts of the market will fall the most. The sharp cut in valuations of companies that have the highest returns in the US markets during the post-COVID bull run is a clear warning to investors in emerging markets.
Where the valuation froth is higher, the correction will be steeper. So taking money out of very expensive stocks will help Investors avoid drawdowns in them. Avoiding drawdowns helps investors maintain ample confidence when markets fall. Simply by ensuring your portfolio is falling less, you develop the confidence to invest more.
This is a time to preserve your capital and your investment confidence. Only that will help you buy when the market corrects further.