Stock market ups and downs are common, but market corrections can cause panic among investors. If you want to protect your portfolio, you need to adopt the right investment strategies. This article explains 5 proven strategies to help safeguard your portfolio during market corrections.
Adopt the Core and Satellite Portfolio Strategy
During market booms, investors often get attracted to high-risk stocks, which can lead to heavy losses during corrections. Thus, it’s crucial to divide your portfolio into core and satellite strategies.
- Core Portfolio (70-80%): This is the stable part of your portfolio, including stable, safe, and defensive stocks such as those in FMCG (Fast Moving Consumer Goods), Pharma, and Utilities sectors.
- Satellite Portfolio (20-30%): This part contains high-growth stocks that perform well in a booming market but tend to fall more during market corrections.
Benefit: The core portfolio keeps your capital safe during market corrections, while the satellite portfolio offers growth opportunities.
Choose the Right Number of Stocks
Many investors buy too many stocks, making their portfolio difficult to manage.
- For new investors: A diversified portfolio of 20-30 stocks is ideal.
- For experienced investors: 10-15 stocks are sufficient.
- Sector Diversification: Don’t allocate more than 25% of your capital to any one sector.
Benefit: Proper diversification reduces risk during market corrections and keeps the portfolio balanced.
Avoid Sector Chasing
There is always a sector in trend in the market, like the IPO boom or PSU Banks’ good performance. Investors often follow these trends and incur losses.
- Correct approach:
- Invest in sectors where you understand the companies’ business models.
- If you could envision being the CEO of a company and managing it, that stock should be in your portfolio.
- Avoid momentum investing, as it only works in the short term.
Benefit: Sectoral diversification reduces losses during market corrections and provides long-term wealth creation opportunities.
Avoid Overvalued Stocks (High P/E Stocks)
Sometimes, investors buy overvalued stocks due to market hype.
- Understand the P/E Ratio (Price-to-Earnings Ratio): If a company’s P/E ratio is too high, its price may be inflated.
- Selecting Multibagger Stocks: Good stocks have both earnings growth and P/E expansion.
- Note: High P/E stocks are not always loss-making, but they fall more during market corrections.
Benefit: Selecting cheap and good stocks keeps your portfolio safe during market corrections.
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Investment Diversification
During market corrections, many investors rely heavily on equity and forget other asset classes.
- Gold: Generally remains stable when the market falls.
- Real Estate: A good option for long-term investment.
- Mutual Funds: If selecting stocks yourself is difficult, invest in mutual funds through SIP (Systematic Investment Plan).
Benefit: A diversified portfolio avoids significant losses during market corrections.
Also Read: Stocks to Watch in January 2025: 7 Companies with Ex-dividend, Bonus, and Split Announcements
Exit from Poor Performing Stocks
Investors often keep loss-making stocks in their portfolios, hoping to sell them at the purchase price. However, it is wise to replace bad stocks with good ones.
Smart investors acknowledge their mistakes and correct them.
Also Read: Smart Investment Strategies by Motilal Oswal in 2025: Opportunities in Uncertainty
Conclusion
Market corrections can be opportunities if you adopt the right strategies.
- Create a Core and Satellite Portfolio.
- Maintain the right number of stocks.
- Avoid sector chasing.
- Avoid getting stuck in overvalued stocks.
- Diversify your investments.
Also Read: Indian Railway Stocks to Watch: Upto 50% Discount from High
By following these rules, your portfolio will remain safe during market corrections and create wealth in the long term.