I see a lot of unnecessary concerns being shared over what markets are doing and how are they expected to behave going forward looking at past data. While such an analysis looks neat, it may not still help much.
We need to come back to the first principles of investing. What investing at its core is laying out some cash today in expectation of a series or one-time cash flow in the future. I see that the present correction (or for that matter any other correction) has in no way impacted this series much except that it has lowered the first of the cash flow in this series (which is the only negative cashflow and where you need to pay upfront for getting the positive cash-flows later). So fundamentally, a lot of the universe is still working with approximately same set of numbers. In many businesses, much of the cash flows expected is going to be the same - in January 2018 and in October 2018. In cases where it has changed for the worse, frequently one would find that the although the positive cashflows have decreased a bit, the negative cashflow has seen more than adequate fall to compensate for the same.
The corollary of the first principle is also that we should never pay more than what we are going to get in the future (unless we are a shopoholic ;-)), so people who have overpaid in the past will always see some losses unless they were smart enough to sell to somebody else while the music was still on. However now that the music is not on, it makes sense to recalculate the equation of cash flows and decide accordingly. One should not shy away from booking losses if so be the demand of reality.
Charlie Munger has said repeatedly that investing is simple but not easy. Ups and downs in the stock market are part and parcel of the life of a long-term equity investor. While equity as an asset class has given the highest returns across geographies, the cost of this high return has been gut-wrenching volatility. And this is the reason the path of the creation of long-term wealth through equities is simple but not easy. Simple because one just needs to partner with businesses for the long term at unfair terms (which stock markets showers us with from time to time and especially during bear markets) but not easy because bringing knowledge to life is easier said than done (the difference between idea and execution of idea). In India, life is made more difficult through all-pervasive lack of ethics amongst promoters and many important market participants.
Now coming to the question of what an investor should do in the present scenario, clearly there is no reason to get out at current levels except if you have been investing in stocks which trade at very expensive valuations or stocks where business doesn’t merit the valuations or portfolio strategies which only deal with ridiculous valued stocks in the name of quality (1 cr invested 2 months back in the PMS of a worshiper of only quality is worth only 73 lakhs as of yesterday - this paper loss is not a concern but the continued over-valuation of many of the stocks in the portfolio is). The other factor to consider is your overall equity allocation as a % of your family net-worth - if that’s too low (say 20% or lower), then it makes sense to increase it a bit now (unless you are nearing retirement or later). If that’s too high (say 45% or higher), then it makes sense to decrease it a bit by getting out of stocks which are still expensive. Else, you are advised to just stay put and not bother too much about paper losses.
One more thing - because small and mid caps have fallen much more than large caps, some supposed to be experts on TV and newspaper are now saying that it makes sense to move completely to large caps and highest quality stocks. This wrong advice is also being touted by all the brokers and other people who are supposed to be custodians of your wealth. This is behaving like a know-nothing investor. This is an advice best not paid any heed to. If at all, this was a useful advice till early this year. Being contrarian is the only way to create wealth through equities so whatever you do, please be mindful of whether you are following the herd mentality and consensus trade. And if you are not taking a bit different stance from the crowd, then why even bother, just start a SIP in NIFTY or give the money to a smart, trustworthy and high integrity manager and enjoy your life - this by the way is what is required by most investors - unfortunately 90% of the investors think they are above average investors.