Sell in May and go away. Wishing you have followed this old maxim before the market went into the current downslide?

But who can predict which way the markets will move tomorrow? So, people keep holding on to their stocks even when the markets fall. The losses mount as stock prices slide deeper and deeper.

According to experts, the recent fall in stock markets, which wiped out all of the sensex’s gains this year, is a healthy correction and investors are getting a better deal as shares are now available cheaper than they were a couple of months ago. In practice, however, the rapid drop in the markets has done very little for investor confidence.

But can you make money even in a falling market? The answer is: money can be made by not losing any.

Cut losses

So, let us deal with how one can reduce losses since it is the primary concern for every investor during a falling market.

Not every stock in a market is equally volatile. At any point of time, there will be some stocks that will fluctuate with greater amplitude than the broader market index. Then there are some others that will sway in sync with the market index and to the same extent. Finally, there are some stocks that are less volatile compared with the index.

Check the beta

This covariance of a stock’s relative volatility with respect to the broader market movement is measured by the ‘beta’ value of the stock. A stock having a ‘beta’ value of one implies that if the market index decreases or increases by, say, 10 per cent, the stock’s price will also decrease or increase by 10 per cent.

The price of a stock having a ‘beta’ value of two will decrease or increase by 20 per cent if the share price index falls or rises by 10 per cent.

Thus, by holding on to a high ‘beta’ value stock during a falling market you stand to lose more than by holding a stock that has a ‘beta’ value less than one. So, every time the market slips, you can reduce your loss by switching from high ‘beta’ value stocks to low ‘beta’ stocks and vice-versa during a rising market.

Derivatives

The loss during a falling market can also be hedged with derivative products such as futures and options.

Cost averaging

However, for lay investors, an easy way out could be cost averaging. This means buying good stocks at every fall in prices thereby bringing down the average cost of acquisition and at the same time increasing the share units in the investment portfolio. When the market takes a U-turn, you don’t have to wait till the share prices rise to your initial purchase level, you make profit even when the share prices rise only halfway to the level from where they had fallen.

Cash is king

However, ‘cash is king’ in any falling market, particularly when the general interest rate is rising. Now banks are offering 9 per cent or more for one to three-year taxable fixed deposit and for five-year tax-saving fixed deposits. The one-year fixed maturity plans of mutual funds are also giving more than 10 per cent return now.

It would be wise to reallocate some of your equity investments to these fixed income assets not only to ensure an assured return, but also to reduce your capital at risk.

Capital protection oriented funds come handy for retail investors during a falling market. Such schemes are now being offered by mutual funds and life insurance companies in their unit-linked plans. These plans offer a chance to share in any stock market growth over a set period, but promise the capital back at the end if markets have fallen. They suit lumpsum investors as well as regular savers.

Fund-of-funds

Finally, there are ‘fund-of-funds’ in the mutual funds space. These funds invest purely in a range of other funds. Also known as multi-manager funds, the benefit to an investor is that they get a diversified portfolio of investments under one holding without having to research the individual funds.

The silver lining of stock investment is that there is no perennial downslide or upswing in prices. The markets keep coming down and going up and this volatility helps in making money from stock investment. If the markets have come down now, they will definitely go up again.

The flip side is that no one can truly time the market. What does matter is the length of time you are invested and the basic rule is to buy at low prices and sell at high prices.