At first glance, the answer to this question might seem obvious, why stress over stock market swings when we can simply ride out the ups and downs? Yet, when we look at history, we see that even the brightest minds have been caught off guard by market behaviour.
One famous example is Sir Isaac Newton, the man celebrated for discovering gravity and inventing calculus. Newton once famously admitted, “I can calculate the motions of the heavenly bodies, but not the madness of people.” He said this after he lost what would now be millions of pounds in the South Sea Bubble of 1720. His experience stands as a powerful lesson: no matter how brilliant we are, predicting the erratic nature of market sentiment is almost impossible.
History is full of instances when high market levels were eventually followed by dramatic downturns. Besides the South Sea Bubble, there have been many market bubbles and crashes, the dotcom bubble of 2000, the Global Financial Crisis of 2008, the NBFC crisis in 2018, and even the recent downturn seen between late 2024 and early 2025. Each event shows that when markets reach extreme highs, they can quickly reverse course, leading to significant losses for many investors.
Yet, on the flip side, there are a group of investors who remain ever optimistic. They believe that with strong economic data, buoyant investor sentiment, steady interest rates, and strategies like “Sell China, Buy India” gaining popularity, markets will always climb to new heights.
It is true that if the economic fundamentals are solid, markets tend to reach record levels. However, what often causes a market to stray from these fundamentals is uncertainty. Consider bonds: when you invest in a bond, you know the interest rate, the payment dates, and the maturity date. That certainty keeps bonds stable. Stocks, however, are subject to a mix of hard data and unpredictable human emotions.
So, should we worry about the market crashing or hitting record highs? Or should we maintain a level head regardless of market conditions? One useful way to answer that is by using a simple checklist to gauge the pulse of the market. The idea of a checklist might seem basic, but its power was famously demonstrated at Johns Hopkins University. There, a simple five-step checklist, covering essential tasks such as washing hands and properly covering a patient, helped reduce ICU infections dramatically.
Just as that checklist saved lives, a clear set of rules can help investors avoid common mistakes and focus on what matters. In this blogpost, let’s explore an eight-step checklist that can help anyone evaluate the market’s condition.
Table of Contents
8 Step checklist
1. Are company earnings growing at a healthy rate?
Earnings growth is a critical indicator of a company’s strength. When a company consistently increases its profits, it suggests that the business is expanding and becoming more efficient. Many successful investors, like William O’Neil, have stressed that significant stock price moves are often accompanied by strong earnings growth. When a company exceeds earnings expectations, investors view it as a positive sign, one that can lead to rising stock prices as confidence in future profitability builds. Conversely, if a company is predicted to grow at a certain rate but falls short, its stock price can drop. Over several quarters, slow or inconsistent growth can drive investors away, causing even steeper declines in the share price.
2. Is the market valuation reasonable?
Valuation is all about how much investors believe a company’s stock is worth. When earnings rise sharply, it can lead to a market where stocks become overvalued, sometimes far beyond what the fundamentals justify. Investors must be careful when market prices seem inflated because this could signal an upcoming correction. History shows that stock prices sometimes lag behind or get ahead of actual company performance.
For example, in some fiscal years, even when companies report strong earnings, the market may take its time to catch up, offering a margin of safety. But when the market quickly aligns with these strong earnings, it may create an overbought situation where prices are too high and unsustainable over time.
3. Are companies reducing their Borrowing?
Borrowing money to grow a business is a common practice, but it can be a double-edged sword. When companies borrow at low interest rates with the hope of boosting earnings, it might seem like a win–win strategy. However, if the growth doesn’t meet expectations, creditors will not wait indefinitely for a turnaround. High levels of borrowing, if not managed well, can lead to a situation where a company struggles to meet its financial obligations.
This is one reason why the market crashed by nearly 60 percent in 2008. Over the last decade, many Indian companies have worked to lower their reliance on loans. A decreasing debt-to-equity ratio, for instance, from 0.74 to 0.19 among BSE 500 companies as of March 2024, indicates a healthier financial situation and less vulnerability in tough times.
4. Is the Economy’s consumption story ‘Strong’?
The strength of an economy is closely tied to consumer spending. When more people have secure jobs and stable incomes, they tend to spend more money on everyday goods and services. This spending boosts business revenues and, by extension, the stock market. In India, for example, the unemployment rate has fallen steadily over the past two decades, from 8.7 percent in 2005 to 6.4 percent in 2024.
Such improvements suggest that more individuals are employed, which strengthens consumer demand and supports market growth. A robust consumption story can help sustain business growth even when other market factors are uncertain.
5. Can the market absorb outflows of Foreign Capital?
Not long ago, foreign investors played a dominant role in India’s stock market. When these investors pulled their money out, the market suffered significant declines, as seen in past crises. However, today the situation is much different. Domestic investors, including both large institutions and individual retail investors, now contribute significantly to market stability.
For example, even when foreign institutions sold billions of dollars in Asian equities, with half of that amount linked to India, the domestic inflows, particularly through Systematic Investment Plans (SIPs), helped keep the market from crashing dramatically. This shift means that local money now acts as a buffer against the impact of foreign capital leaving the market.
6. Are Promoters holding on to their shares?
The behaviour of company promoters, the people who started or control a company, can reveal a lot about their confidence in the business. If promoters begin selling their shares, it could be a sign that they have lost faith in the company’s future. On the contrary, when promoters continue to hold a significant portion of their shares, it sends a positive signal to other investors.
In India, it is encouraging to note that in two-thirds of companies, promoters have maintained or even increased their stake over the past decade. This behaviour suggests that those closest to the business are confident in its long-term prospects, which in turn can attract more outside investors.
7. Is the Market shielded from the unexpected?
Unpredictable events like wars, political upheavals, or sudden changes in government policy can inject a high degree of uncertainty into the market. Such events can lead to dramatic swings in stock prices, making even the strongest markets seem unstable. While it is impossible to prepare for every unforeseen event, understanding that some level of risk is always present can help investors remain calm during turbulent times. Having a diversified portfolio and a solid strategy can mitigate the negative effects of these unexpected shocks.
8. Are Investors comfortable with soaring markets?
When the market reaches record highs, many investors naturally feel excited—after all, rising prices mean that their investments are growing in value. However, this excitement can quickly turn into anxiety, especially for those who have never experienced a full market cycle. New investors might fear that a steep rise in the market could be followed by a severe downturn.
This fear can trigger herd behaviour, where investors rush to sell their stocks at the first sign of trouble, thereby amplifying market volatility. It is essential for investors to keep their emotions in check and focus on long-term goals rather than short-term fluctuations.
Understanding Market Trends and Investor Behaviour
One of the most critical lessons in investing is that markets are driven not only by solid economic data but also by human emotions. While companies may perform well financially, the collective feelings of greed, fear, and hope can push stock prices far above, or below, their real value. For instance, during periods of high optimism, investors may ignore potential warning signs and continue to buy stocks, driving prices to unsustainable levels.
In contrast, when a wave of fear hits, even companies with strong fundamentals can see their stock prices plummet. The market, therefore, is as much a reflection of psychology as it is of numbers and balance sheets.
Practical Strategies to Handle Market Volatility
Since the market is inherently unpredictable, it is wise to follow practical strategies that protect your investments:
- Stay Informed: Regularly review financial news, company earnings, and economic reports to understand current trends. Knowledge is your best defence against sudden surprises.
- Diversify Your Portfolio: Spread your investments across various sectors and asset classes. A diversified portfolio helps reduce the risk of severe losses in any one area.
- Focus on Long-Term Goals: While short-term fluctuations can be alarming, your long-term financial objectives should guide your decisions. Remember that markets naturally cycle through highs and lows.
- Avoid Emotional Decisions: Try not to make hasty moves based on fear or excitement. Stick to your investment plan even when the market is volatile.
- Rebalance Regularly: Over time, market movements can alter the balance of your portfolio. Regular rebalancing helps restore your desired asset allocation and manage risk effectively.
Key Investment Principles for a Strong Financial Future
Building on the insights from our checklist, here are five principles that can help guide your investment journey:
- Maintain a Consistent Asset Allocation: Begin with a clear plan that outlines your risk tolerance and investment goals. Over time, your portfolio might shift away from this plan as market values change. Regular rebalancing ensures that your investments continue to reflect your original strategy, reducing your exposure to unforeseen risks.
- Limit Exposure to Volatile Assets: While the potential for high returns in mid-cap and small-cap stocks can be tempting, they are also more unpredictable. Keeping your allocation to these riskier assets to no more than 20% of your portfolio can protect you from significant losses when these stocks underperform.
- Move to Safer Investments as Goals Near: When important financial goals, such as buying a home or funding education, are close at hand, it’s smart to shift some of your money into less risky assets like bonds or fixed deposits. This strategy minimizes the chance that a market downturn will wipe out your savings right when you need them.
- Stick to a Regular Investment Schedule: Trying to time the market by stopping and restarting investments may seem appealing, but it rarely results in better returns. By investing regularly—through systematic investment plans (SIPs) or other methods—you take advantage of compounding and reduce the impact of market volatility over time.
- View Market Corrections as Opportunities: Market corrections, even those where prices drop 20% or more, are a normal part of the investment cycle. Experienced investors often see these periods as chances to buy quality stocks at lower prices. By maintaining a long-term perspective, you can turn market downturns into opportunities rather than reasons to panic.
Learning from Real-Life Examples
Consider the story of an investor who built a large portfolio during a booming market. Suppose this investor started with a balanced mix—say, 70% stocks and 30% bonds—but allowed the rising market to tilt this mix heavily in favour of stocks. If the market then takes a sharp downturn, the investor’s portfolio could suffer drastically because of this imbalance. In contrast, if the investor had periodically rebalanced the portfolio, the loss would have been less severe. Real-life examples like these underscores the importance of discipline and adherence to a well-planned strategy.
Another illustrative example is the role of domestic versus foreign investors. In past crises, heavy outflows by foreign investors led to sharp market declines. However, with the rise of domestic investment, via mutual funds, SIPs, and other local financial instruments, the market has grown more resilient. This shift highlights that a diverse base of investors can help cushion the blow of sudden market stress and contribute to long-term stability.
Final Thoughts
The journey of investing is not about predicting every twist and turn of the market. Instead, it is about building a solid foundation with disciplined strategies and a focus on long-term goals. The historical examples remind us that even the smartest investors can be misled by market exuberance or fear. What matters most is having a clear plan, sticking to it, and not getting swayed by the unpredictable moods of the market.
In essence, it is not necessary to predict whether the market will crash or continue to soar. Instead, a simple checklist can cut through the complexity and help you concentrate on the fundamentals that really count. Also, by following the basic principles discussed in this blogpost, you can set yourself up for long-term success.
Remember, investing is a long-term pursuit. While the market may experience periods of dramatic highs and painful lows, these fluctuations are simply part of the natural cycle. By keeping your focus on the fundamentals and not trying to time every market move, you can build a resilient investment strategy that grows with you over time.
After all, success in investing is less about forecasting every twist and more about staying true to your plan and allowing time to work its magic.
You can check out my other blogpost on why 90% of stock market participants lose money.
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