Falling markets are just what you needed. Here’s why

Investing in stocks is often described as simple but not easy. Yet, for much of the past twelve months, making money in the market seemed to be just that—simple and easy. It felt almost effortless. Any approach, from thoughtful strategies to pure intuition, seemed to yield handsome returns. The more you invested, the more you made. The less you understood the risks involved, even if it was part of your family’s future, the richer you got.

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But that era may have passed. No one knows for sure; perhaps an even greater opportunity lies ahead. Yet, the recent stock market sell-off has forced investors to take a pause—and that’s a good thing. Here’s why.

First, true performance is measured not by how your portfolio fares in a steadily rising market, but by how it holds up when things go south. If your portfolio has fallen less than the market in this downturn, give yourself a pat on the back—you’re clearly on the right track. If, however, your portfolio has taken a steeper dive, it’s a sign that something is amiss. This market drop offers a valuable reflection on where you stand as an investor, and it’s a lesson that was perhaps overdue.

Second, if your portfolio has indeed underperformed the market, it could be an indicator of excessive risk-taking. You may have been reaching for returns without enough regard for potential losses. Now that the downside has arrived, you’re paying the price. Hopefully, you aren’t over-leveraged, and this experience won’t prove too costly. Either way, this correction is a chance to better understand your risk tolerance and adjust your portfolio to align with your comfort level. The era of mindlessly chasing returns should likely end here.

This brings us to the third point: for some, this may be an ideal time for a complete financial reset. Few investors follow a clear plan to meet their life goals, often jumping from one investment opportunity to another (the latest being defence sector funds, perhaps). Many became overexposed to stocks, even moving funds from safer fixed deposits. Now, with markets down, these investors are feeling the sting. Imagine shifting from a stable 7% in fixed deposits to a -20% loss in stocks—it’s a hard hit. This market sell-off should serve as a wake-up call to create and commit to a long-term financial plan and a balanced asset allocation.

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This isn’t just theory. Time and again, well-diversified plans have been seen to hold up better in downturns. Over the last month or so (since the market peaked on 27 September), we’ve seen this play out across asset classes: the Sensex is down about 10% (with some individual stocks down far more); gold has only dipped by 4%; real estate remains steady; and cash holdings in banks and fixed deposits have grown. A balanced portfolio tends to stabilize losses.

When it comes to mutual funds, the disparity is even clearer. In the past month alone, some equity funds are down over 10%, while others have lost as little as 4%. The results boil down to how well you’ve selected your stocks and funds.

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If you’ve managed this balance well, congratulations—you’re ahead of the game. Your portfolio hasn’t fallen in line with the market, and you’re outperforming. But for those hit hard, this is a chance to reassess everything. Use this as an opportunity to prepare yourself for the next big upswing.

Rahul Goel is a finance and publishing professional with over 25 years of experience in the industry. You can tweet him @rahulgoel477.

You should always consult your personal investment advisor/wealth manager before making any decisions.