Stay invested or exit the market? What investors should do in a slump

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Subscribe to enjoy similar stories. The questions I get these days often are along the lines of “What should I do about my portfolio now?" or “Should I get out of the market?" and “Should I stop my SIPs?" Before I tackle these questions, let us look at what has happened in the stock market in the recent past and why there is blood on the street. The first striking aspect is the substantial divergence between the moves of market indices and those of stocks in the last few months.

If the Sensex is down about 12% from its peak and even the SmallCap index is down “only" 23%, why does it feel so much worse? Taking data from Mintdated 19 February 2025, the devil lies in the details. Although the indices appear to have declined moderately, the impact is more severe because, as of that date, about 64% of stocks were down between 25% and 50% from their 52-week highs. An additional 19% had fallen by 50-80%.

Thus, about 85% of listed stocks were down by over 25%. This means that while the decline of indices does not appear to be too much, the overall portfolio pain is dramatically heightened due to far steeper falls in individual stock prices. This is still about what has happened.

Coming back to the question of what to do now, we have to understand the basic framework. A series of academic studies across continents, from the US to South America and Europe, all show the same result—that sentiment is a contra-indicator. What does this mean? It means that when people are fearful, nervous, uncertain, anxious about investing or staying invested in markets, the returns for the next period are above average.