Investors tend to make costly decisions when the market turns downwards. No one likes to see falling prices and money loss. It’s bound to make anyone stressed and anxious. However, decisions investors make at this moment can either be smart, or investors can end up paying a heavy price. Here are some mistakes people should avoid during a dip in the market:
1. Buying more to average
Some investors tend to compound their mistakes. If the market dips and the stock you bought also drops, don’t buy more shares of the stock in order the decrease your average buying price. People tend to think that they can cover their losses by buying more of the same shares, but at a lower price. This is not the case. It does make sense why people would think this way, however. If the stock’s bases are strong and the drop in price is because of something outside of the company, averaging down the price could have an upside. If the fundamentals behind the stock have also taken a downturn, however, then averaging will only worsen your losses.
2. Getting anchored to a price
People set a benchmark price for the shares they purchased more often than they should. This could be the purchase price, but it could also be the highest price the stock has gotten to. Decisions in the future on this stock are based upon this and anchoring to a price level could make people hold onto their stocks for longer than they should when the market turns down. The share price could drop for a wide variety of reasons, but investors hold onto their shares because it is below the price that they pay. They hope that the price will go back to that level without examining the fundamentals of the stock. Instead, if the price of the stock you bought has dropped, do research and find out why this might be the case. If there are internal reasons for the drop such as a lack of earnings visibility, it is better to sell and stop your losses.
3. Buy scrips at 52-week low prices
People sometimes become value pickers when the market dips. They look for stocks that trade near their 52-week low as these are seen as good bargains because they think that the dip in the market has already affected the price. A lot of these actually turn out to be value traps because it’s very hard to determine when a stock has bottomed out. Even if you are highly convinced that this is the case, you should be ready to experience some losses in the next term because it takes time for the market to digest the value in the stock.
4. Falling for confirmation bias
Sometimes investors will start reading too many research reports and watching too much investor news. They will try to look for information or experts that support their beliefs and ignore the actual facts. This will have even more damage when the market takes a dip because your judgement will be skewed and you are more likely to make a bad decision. For example, you could get some form of confirmation bias after you read an article that supports your stance on your stocks, but this will make you too optimistic. You have to remember to look at the negative information that comes out about the stock as well and weigh the pros and cons.
5. Altering your financial plan
A drop in the market can make people change their financial plans or their investment strategy. People might try to increase their exposure to equities to benefit from the market correction, while other people might try to take out all of their money. Don’t make your decisions or invest in a way only because of the way the market is moving currently. The future most likely will be different. People have to be patient and remember their long-term goals instead of making decisions at that moment.
6. Taking leveraged bets
You might be encouraged by brokerage houses to take leveraged bets. Leverage and margin investing can get you high returns, but there are also big losses and risk associated with these. This should be automatically avoided, especially when the market is unstable. If you take leverage, your investment must earn at least the rate of interest that you are paying on the borrowed capital. This investment could go either way, however, especially if you panic when the market turns. Buying on margin is never a good idea as if limits your options.
7. Over-diversify your stocks portfolio
People usually tend to put a lot of money into a few stocks while mutual funds diversify in order to reduce their risk. This kind of exposure and lack of diversification in your portfolio could be costly when the market turns, however, too much diversification is not good. Investors might try to reduce their risk by putting their money into multiple companies or across multiple sectors. This could limit the downturn, but it will also prevent you from making large returns when the market turns back upwards. It is also very difficult to manage a large amount of stocks unless they are within one mutual fund.
8. Stopping SIPs because of the dip
People sometimes stop their systematic investment plan (SIPs) in equity funds when the market dips. However, the entire goal of your SIP uses a bear period in the market to help you long-term. When the markets turn up again, you will earn benefits because you bought more units at lower prices when the market had turned down. If you stop the SIP you will stop the compounding benefit of equities. You should stick to your SIP especially if you are new to investing.
9. Don’t sell stocks and run to cash
Most people think that cash is safe and that stocks carry a lot of risk in a bear market. However, cash is not always the answer, especially if you have long-term investment goals. Cash will minimize your paper losses when the market dips, but the market will always rebound and stock prices will go up again. Many people who leave don’t rejoin at a good time and they miss the opportunity to earn money if they sold their shares when the market was in a downturn.
10. Don’t think your portfolio is conservative if it’s not
Some people think this way, and this can have major costs. Many people have portfolios that are very aggressive and carry a lot of risk. People end up losing great deals of money this way, especially if people don’t decrease their exposure to risk as they get older and closer to retirement. People tend to suffer losses that they can’t recover from and they have to continue to work instead of retire.
11. Don’t own all risky things
If you try to overshoot and buy the most risky stock, funds, and/or bonds is going to cost you greatly. Yes, these can have the highest return if they do well, but you have to protect your portfolio and manage your risk. Eventually, you are going to want to retire and have money in savings in case of an emergency. You don’t want to lose all of this.
12. Don’t try to time the market
It is impossible to time the market exactly. Make sure to examine and think about your long-term investment goals and be patient. Stay in it throughout the different turns of the market, and you will eventually reap the benefits. People can’t always predict when the market is going to take a turn, however, it is important to look at the stock’s yearly, five-year, and ten-year returns before making a decision of whether or not to buy shares in it or not.