August 4, 2022
The stock market has seen a sharp correction over the last few months, making the investors anxious. During such falling markets the investors make some moves which impact their long term financial goals. Trading when market is volatile can be challenging. Jittery markets do not mean that the investors should start to panic sell.
Here are 5 common mistakes investors to during falling market:
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Concentration (Relying too much on a single stock)– Do not put all your eggs in one basket is a very common saying. Thus, one should not rely too much on a single stock. If an investor hears a rumour about a particular company delivering larger gains, they should not sell other shares and increase allocation in one share. This will lead to one company holding majority allocation in the portfolio. If the market shifts that one stock might not perform the way it should which will lead to higher losses.
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Panic Selling– Investment decisions should always be made rationally, not emotionally. If the portfolio is well-diversified and balanced based on your personal risk tolerance, long-term financial goals and investment time horizon, there’s absolutely no reason to sell the investments. Even the most optimistic investor should understand that the stock market doesn’t rise in a straight line. Selling in a falling market insures that you lock in your losses.
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Forgetting to Rebalance– During a falling market, a portfolio’s asset allocation to equities tends to decrease substantially, as equities drop and bonds rally. Often shocked by the move, investors may neglect to rebalance their portfolios back into equities and, as a result, may extend the amount of time the portfolio takes to recover from market drawdown.
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Stopping SIPs– One of the most common mistakes is stopping SIPs in the falling market. This defeats the very purpose of SIPs. Only when an investor is buying in a bearish market will he get the advantage of rupee cost averaging. Stopping the SIPs will interrupt the compounding effect of equity and lead to impacting the long term goal. Investors should avoid to time the market. Always remember staying out of the market is a greater risk than being invested.
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Obsess Over the Market– Investors have access to endless stock market media coverage. During times of market downturns, almost all that coverage will be negative. Investors are influenced, both positively and negatively by any change in the financial market. Investors are swamped with advertisements about the financial market which causes the investors to track each development in the market leading to market obsession. Obsession will lead to making emotional decisions rather than rational.
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