This month’s volatile market sell-off is a reminder of just how delicate the stock market can be. It’s been roughly a decade since U.S. and investors worldwide have had to deal with a potentially major stock market decline due to deadly disease such as Covid-19.
If the recent stock market sell-off is the beginning of an even larger decline, investors need to be comfortable with their game plan for navigating an extended period of market under performance. There’s no perfect formula for investing in a down market, but here are seven of the worst decisions investors can make during a market downturn.
They Sell Everything from Shares to Commodities.
Assuming your 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 your stocks and retreat to cash. Even the most optimistic long-term investor should understand that the stock market doesn’t rise in a straight line.
Investment decisions should always be made rationally, not emotionally. It’s difficult not to panic when the market is tanking. For long-term financial plans to work, its critical for investors to stay the course during times of market weakness. Panic can lead to irrational decisions, such as selling after the worst of the downturn has already occurred, It’s like Selling during a sell-off may feel the like right choice at the time, but it will most likely result in a permanent loss of capital.
They do too much.
There’s nothing wrong with adjusting or re-balancing your portfolio a bit during a market downturn, but there’s no need to reinvent the wheel. For extremely proactive investors, it may be difficult to sit on your hands and watch your portfolio suffer rather than take action.
They are too short-sighted.
The worst-case scenario during a stock sell-off is that the Stock Markets might enter a bear market. However, the average U.S. and other major markets bear market has lasted just 1.4 years. Trying to time the market in the short term is the biggest mistake the investors make. It’s the volatility of the stock market that allows future gains to be made and if you continue to add to your investments, that allows the stock market to have higher average returns than other asset classes.
They obsess over the market.
Investors have access to 24 hours of endless stock market media coverage. During times of market downturns, almost all that coverage will be negative. Exposing yourself to hours of negative market news every day can subtly impact your feelings about investing in irrational ways. So, stay cool, perform yoga and meditate to reduce stress.
They try to ‘catch a falling knife.‘
Adding to long-term core portfolio holdings responsibly as prices fall is a perfectly fine approach to a stock market decline, but never try to recoup losses by timing the bottom in some of the worst-performing stocks. This mentality is often referred to as “catching a falling knife.” There’s an old adage on Wall Street about how a stock falls by 90 percent – first it falls 80 percent, then it falls 50 percent. Just because a stock is down big doesn’t mean there’s not significant downside remaining. Trying to time a volatile market is a dangerous game.
They worry about numbers.
Buying or selling stocks based on the price at which you originally bought a stock, attempting to preserve a specific profit level in a portfolio or buying a low-quality stock just because it appears to have a “cheap” share price are three mistakes investors can make during a downturn. It’s natural to try to think about investing in terms of profits, losses and prices, but successful long-term investing is more about traits that are difficult to quantify, such as quality, value, patience, diversify and discipline.
So, just relax and let the markets settle down first, then think of investing in Shares. Keep cash in hand available so that you can utilize the opportunity of acquiring Blue chip shares at the lowest rates.