The stock market has witnessed a stinging correction over the past couple of months and thus made the investors strained and concerned. Often, it happens to be a sliding market, where the anxious investors end up paying a heavy price for their injudicious moves. Any destruction of such extent will make the investors lose their confidence along with their fortune.
Some of the common mistakes investors must avoid in such situations are as follows:
Attempting to seize the bottom
No one can predict what will be the precise top or bottom in a falling market. Therefore, instead of trying to predict the bottom, it is wise to determine the value and the target price of the stocks that they are planning to invest in, either through a fundamental or technical, or any other method they follow. After deciding, they can buy it within the range of 5% to 10% of the price. Be certain not to wait too long to buy a stock, because if you wait for every variability and every doubt of yours to be cleared, you will be waiting forever.
Investors will cram down the news and research reports on investments when the stocks go into an unexpected tailspin. Nevertheless, they tend to ignore data that disproves their original thesis, by looking out for information or signs that support their beliefs. This confirmation bias works time and a half during a falling market and can deform all your judgments of the situation and lead your way towards poor decisions.
When it comes to the stock market, the composure of the investors is the key to their success. The investors have to do only one thing in the stock market, that is to buy worthy stocks and give ample time for them to grow. An undeniable fact is that impatient people are the ones who mostly lose their money in the stock market. Despite the fact that most of these people can find a good stock they fail to make any profit out of it as they do not wait in times of a crisis. If the cause for the fall in price has to do with external factors rather than a change in the basics of the stocks, then holding on to the stocks for some more time will be fruitful in the end.
Changing enduring strategies
Investors mostly try to change their investment strategies when the market goes bearish engulfed in panic. This erodes the long-term strategy that will slow down the speed of achieving their financial goals. Investors can effectively block and tackle this short-term event by building a portfolio that can go through the long run.
Delusion over markets
Inventors have the access to 24 hours of never-ending stock market coverage. When the market is facing a downturn, nearly all the media coverage will ooze negativity among the investors. Lay bare before hours and hours of negative news about the markets will eventually affect your sentiments in unreasonable ways. Such news will invoke self-doubts and makes you question your own thesis, even if it is built on rock-hard facts. Never place yourself in such a position of being obsessed with the bad news so you won’t miss the good news once the markets are in correcting themselves.
Rising margin bets
Leverages and margin investing can give higher returns as well as losses of such extent. It is wise to avoid this type of investing at all times, especially when the market is unstable. Taking leverage stands in need of the investments to earn a return that is at least equivalent to the rate of interest you spend on the borrowed capital.
Some investors might try to diminish their risk by bestrewing their investments over too many instruments, sectors, and even on the companies within a sector at the same time. Even if this helps you for the moment limiting the downside and comforts your overall portfolio, still, it acts as a barrier and stops you from earning more when the market recovers from the crisis.
Getting seized in a value trap
Getting trapped in a stock whose price appeared to be very appealing when you invested in it but gets stagnated for a long time, as it doesn’t have any such value is called a value trap. Whatever declines the most cannot assure the same pace when it has to rise, but even the sophisticated investors have made such blunder of buying a stock just because of its declining price at the moment.
Judgements blackening by emotions
Whenever faced with a loss, the very first thing most people do often is increasing their lot size for a quick recovery. To be honest, when you suffered a loss earlier, there is no assurance that it will never happen again. Three emotions dominate investors when it comes to investing, they are greed, hope and fear. Most of the investors fail to earn in the stock market not because of the absence of intelligence but because of their inability to overpower their emotions while deciding on their investments.
Buying stocks that are perking up the market
There will always be some stocks in a bearish market, that moves in the opposite direction. This price movement will make the investors believe it to be a qualitative strength without considering analyzing the stocks. Eventually, they will end up with a stock that was reciprocating a specific update of a company/sector and is likely to be very expensive ones in the market.