Equity investments are subject to market risks and market fluctuations do impact the return of equity investors. So, one should never invest the money needed at a short notice during an unforeseen emergency or for meeting any short-term financial goal.
So, an investor may invest in equity the money that he/she may spare for the long term and in case of market crash, may wait for recovery to fulfill a long-term financial goal.
For this, a person should first do financial planning to identify how much money will be needed in how many years to fulfill respective long-term financial goals and invest accordingly to meet the goals by taking minimum financial risks.
In case a person needs to take market risks to meet the goals, he/she should invest in multiple stocks in a phased manner to reduce the risks further. For small investors, investments through systematic investment plan (SIP) in equity mutual funds (MFs) provide a ready-made avenue to reduce the risk through diversification and phased investments.
Ideally, an equity investor should remain unperturbed during market volatility and wait patiently to meet the long-term financial goals.
Who should get worried?
But some investors need to act to protect their investments from a future market crash. Such investors are the persons –
Who are close to their financial goal
A person – who had started equity investment to meet a long-term financial goal – and is close to the goal should get worried about a market crash and should shift his/her investment money out of equity at a high market without waiting for the market to rise further. For example, a person who is about to retire or a person about to get his/her child admitted for higher education etc.
Who have already accumulated the required fund
If a person has already accumulated the fund needed to purchase an asset through equity investment, he/should take out the amount to buy the intended asset without waiting for the market to rise further. For example, a person who had started investing to buy a car or a house or other such a high-value asset. Staying invested out of greed may cost him/her the immediate opportunity to buy the asset, in case of a market crash.
How to deal with the fear of market crash
In case a person is close to his/her investment goal of retirement, child education etc, instead of liquidating the entire investment at one go at a rising market, he/she may take out money in phase manner to secure a part of investment against market crash, while taking advantage of market rally through part investment.
For example, a person close to retirement may take out the money needed in the first 3-5 years of retired life out of equity and move about half of the remaining money to debt, while leaving the rest of the money invested in equity.