How investors can protect portfolios when Sensex and Nifty are down?

Recent sharp declines in Indian equity benchmarks have reminded investors that market rallies can reverse quickly. Experts say resilient portfolios are built not on forecasts, but on sound asset allocation, diversification, regular rebalancing, and alignment with long-term personal financial goals.

After weeks of steady gains, Indian equity markets witnessed a sharp bout of volatility, underlining a hard truth investors often forget during bull runs: market sentiment can turn abruptly. Over the past week, the Sensex dropped nearly 1,700 points and the Nifty 50 fell more than 560 points, rattled by rising geopolitical tensions between the US and the EU over Greenland and renewed fears of a global trade conflict.

Although benchmarks recovered modestly on January 22, trading about 0.5 percent higher intraday, the damage of the previous sessions was evident. The Sensex ended the five-day period down about 1.69 percent, while the Nifty declined roughly 1.3 percent. For many investors, the pullback served as a reminder that strong rallies do not eliminate risk—and that portfolios built purely for favourable market conditions often struggle when volatility returns.

According to market experts, the key lesson from such corrections is not about timing entries or exits, but about portfolio design. Strategies centred solely on stock selection or short-term themes may deliver outsized gains during bull markets, but they often falter during downturns. Instead, long-term wealth creation depends on asset allocation, diversification, discipline, and emotional resilience.

Asset allocation over stock picking

Financial professionals consistently emphasise that asset allocation matters far more than choosing the “right” stocks. A well-structured portfolio spreads investments across multiple asset classes—equities, debt, gold, and global assets—so that weakness in one area is cushioned by stability or strength in another.

“Asset allocation is the single most important driver of portfolio outcomes,” said Shubham Gupta, CFA and co-founder of Growthvine Capital. “You cannot be fully invested in the best-performing asset class at all times. Different assets lead in different phases of the market cycle, and diversification always comes with the trade-off that something will underperform.”

This underperformance, experts say, is not a flaw but a feature. Diversification works only when assets behave differently under stress—not when everything rises together during bull phases. When equity markets fall sharply, exposure to debt instruments, gold, or global assets can help stabilise portfolio value and reduce panic-driven decisions.

Designing for drawdowns, not just growth

Experienced investors design portfolios assuming that significant drawdowns are inevitable. Paramdeep Singh, financial services veteran and founder of Long Tail Venture, said he plans for 20–30 percent equity corrections multiple times over a long investing lifetime.

“I design liquidity so I am never forced to sell at the wrong time,” Singh said. “Holding two to three years of expenses in low-volatility assets provides both financial and emotional stability during downturns.”

Such liquidity buffers allow investors to ride out market stress without liquidating long-term equity holdings at depressed valuations. This approach, experts argue, is especially critical during periods of global uncertainty, when sentiment can shift faster than fundamentals.

Rebalancing: the most counterintuitive discipline

While diversification sets the foundation, rebalancing keeps portfolios aligned over time. Rebalancing involves periodically restoring asset allocations to their original targets as market movements cause drifts. It often requires trimming assets that have performed well and adding to those that have lagged—a process many investors find emotionally difficult.

“Rebalancing is the most counterintuitive part of portfolio management,” Gupta said. “But it’s what keeps the portfolio rational and aligned to long-term goals. It prevents over-concentration in what’s ‘working’ and forces you to add exposure to assets that are temporarily out of favour.”

Singh follows a rules-based approach, rebalancing whenever allocations drift 5–10 percent from their targets. “This removes emotion from decision-making,” he said. “Over full market cycles, this process compounds capital more reliably than chasing short-term performance.”

Avoiding narrative-driven investing

For investors who invest directly in equities, experts advise focusing on companies with strong balance sheets, sustainable cash flows, and sound governance. Chasing popular themes or high-flying narratives may deliver quick gains in rising markets, but these strategies can unravel rapidly when conditions tighten.

“Hot themes often look attractive during bull runs, but they tend to break sharply during downturns,” Gupta said. “Quality businesses with resilient fundamentals are far more likely to survive volatility and recover over time.”

This principle is particularly relevant during periods of heightened uncertainty, when speculative stocks and leveraged bets are usually the first to see heavy selling.

Aligning portfolios with personal goals

Perhaps the most critical message from market experts is that portfolios should be built around individual goals, time horizons, and cash-flow needs—not market predictions.

“Low-conviction investments are the first ones investors exit during volatility,” Gupta noted. “High-conviction allocations are the ones you can hold, or even add to, when markets go south.”

Investors nearing major financial milestones—such as retirement, education funding, or home purchases—may need more conservative allocations compared to younger investors with longer horizons. What works for one investor may not suit another, making personalisation essential.

Staying calm through cycles

Market corrections, while uncomfortable, are a normal part of investing. History shows that markets recover over time, but only investors who stay disciplined are able to benefit from those recoveries. Frequent changes driven by fear or headlines often do more harm than good.

Experts recommend keeping costs low, reviewing portfolios periodically, and avoiding knee-jerk reactions to short-term market movements. By focusing on structure rather than speculation, investors can build portfolios that not only survive downturns but emerge stronger across full market cycles.

As recent market swings demonstrate, volatility is not a signal to abandon long-term plans. Instead, it is a reminder that resilient portfolios are built well before turbulence arrives—through thoughtful asset allocation, diversification that truly works under stress, and the discipline to stay the course.