A falling stock market often brings about panic and chaos among investors. While the few smart ones remain calm and analyze the situation before taking a leap, most people remain clueless about their next move or take hasty, unwarranted decisions. This is why a large number of people unwantedly become a part of the sinking market and end up losing their money.
Here are the 5 mistakes one should avoid making in a falling stock market in order to avoid falling prey to a bearish market:
Waiting for prices to fall further:
This is a common trait among investors, where they buy shares at low prices in a falling market to hedge the investment. On the contrary, instead of buying shares in a falling market, some investors often wait for the prices to fall further. However, one should remember that sometimes they will get lucky and the prices will indeed fall further; however, this does not happen always. By the time these investors decide to buy the stock, the prices start rising again, thus making them buy shares at a higher price. Therefore, it is advised to conduct due analysis and buy stocks (only fundamentally strong stocks) when the market is falling instead of waiting for it to fall further.
Overbuying stocks: In a bid to profit off of Rupee Cost Averaging, many investors run to buy fundamentally strong stocks in a falling market. However, going with the flow and getting overwhelmed might result in the overbuying of stocks, which could turn out to be a big blunder if the transaction is not backed by logic and reason.
Overbuying not only blocks your money in unwanted assets, but also comes with increased risk on the investment. Thus, buying stocks during a falling market should be done very calculatedly to avert any unnecessary risks.
Stopping SIPs: Investors often panic and get the impression that a falling stock market also means a rough patch for their SIP (Systematic Investment Plan). In reality, this is not the case. SIPs are usually long-term investments and hence, the negative impact of short-term market volatility does not affect them. Instead, fund managers of SIPs tend to buy more units of equities in such situations to benefit from Rupee Cost Averaging (RCA). So, stopping SIPs would make no sense in a falling stock market.
Buying penny stocks: Most investors get lured by the idea of buying more units of shares for a lesser price in a falling market. This usually makes most of them head towards penny stocks, which are mostly small-cap shares available at lower prices. One should remember here that such shares may or may not be fundamentally strong. Buying stocks considering only the prices could be a bad idea especially in a bearish market.
Overlooking new market developments: A fall in the stock market can trigger many new developments which could ultimately decide the future course of the market. Hence, overlooking even the smallest of developments could misguide your decision and lead to a blunder. Thus, it is advised to look closely all patterns and events as it will give you a clue of the direction the market will be turning to. This, indeed, will help you formulate further strategies.
In a nutshell, a falling market is not enough reason to submit to panic and chaos. A calm mind, clear fundamentals, and financial discipline can help you weather even the roughest of market storms.