When the stock market gives the first signals of a crash, investors get nervous and unsure. Unsure, because the chances of losing money are getting bigger. Because of this, they tend to commit ill-advised moves. There are definitely big investing mistakes to avoid in a crashing stock market.
You can’t conquer the market all the time, especially if you make mistakes.
In this article, we have listed some of the most common mistakes you have to avoid when the market falls. Read on!
Investing Mistake 1: Price anchoring
Investors usually set a price for theirs, and this price is their benchmark. You should know that this price is the purchase price. However, it could also be the highest level the stock has touched.
As an investor, you would base your future decisions on the stock on this price.
Now here comes the problem: anchoring on such prices leads investors to hold on to stocks longer than they should.
Why do they hold on to it? This is because the share price may have dropped below their benchmarks. They hold hopes that the price will go back to that level, even if they didn’t assess the fundamentals of the stock. You must avoid this.
The first thing you must do when the price has dropped is find out the reason. Then, if you think the reasons are valid, you can cut your losses and exit.
“Investors must realize that the price at which they bought the stock is not what the market has discerned as its fair value,” said Alok Churiwala of Churiwala Securities.
Investing Mistake 2: Buying more to the average
You must be careful not you pile up mistakes over mistakes. When the stock you bought has dropped, you must not buy more shares to lower your average buying price.
Remember that it only works when the stock’s fundamentals are strong and the drop is only outside the company. When the fundamentals have been rotting, averaging becomes a not-so-clever move. It would be like putting yourself in the way of a bullet.
In other words, the more you buy crap, the more your losses will be. There’s no point in throwing your bucks there.
“Averaging down is a good idea only if the underlying stock is of good quality. Even then, fix a limit to the extent to which you want to increase exposure,” says Kunj Bansal of Centrum Wealth.
Investing Mistake 3: Getting swayed by confirmation bias
When the stocks go on self-destruct mode, investors sometimes keep their noses on the news and reports. They keep overly magnified tabs on headlines.
In the process, they also look for signals, even remote ones, that support their views. In doing so, they often ignore other reports that opposes their beliefs. This bias slowly creeps way into investors when a market drops.
It can, and it will, corrupt your judgment. Lastly, it will make you commit bad decisions.
Do not close your mind to negative data, even though it means doom for you. In other words, don’t let emotions cloud your judgment.
Investing Mistake 4: 52-week low prices
When a market drops, some investors transform into value pickers. They look for stocks that are trading near their 52-week low.
Why? Because these are thought to be good bargains. Why? Because they think that much of the downside has already been in the price.
On the contrary, these “opportunities” can become value traps. Why?
First, it is next to impossible to figure out if a stock has already bottomed out. The market can remain irrational for much longer than you expect.
But if you bet on it, and you have high convictions about it, just brace yourself for near-term losses. It sometimes takes time for markets to increase the value of stocks.
“The 52-week low may provide a starting point but it would be a mistake if used in isolation,” said Vikas Gupta, the CEO of Omni Science Capital.
Investing Mistake 5: Changing financial plans
A steep fall in the market sometimes convinces investors to change their plans or investments. Others may be pushed to ramp up their exposures to equity, thinking they will benefit from market correction.
The more conservative investors may take out all the money just to be on the safe side.
What we want to say is that you must not base your investment decisions on the more famous market mood. Don’t forget that the market may turn the other way completely.
“At such times investors tend to forget asset allocation and lose patience. This can hamper wealth creation in the long term,” said Tarun Birani of TBNG Capital advisors.
Remember, you should avoid making spur-of-the-moment decision changes. It’s much better to focus on the long-term goals. Stay inside a well-defined roadmap.
All people make mistakes. You can be excused when you commit one. Of course, it’s normal. But you must remember that in investing, a seemingly simple mistake might mean everything. It’s easy to lose one’s mind when the market appears diving headfirst to the ground. It’s easy to panic. That why you must be extra smart at the first signal of a crash.
If you find yourself already knee-deep in a crash, you may read about some ways to survive a market crash.
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