Over the last few days, the stock market has experienced a significant fall, making investors nervous and uneasy. During a falling market, investors are more likely to make rash decisions. And pay a high price as a result. In this case, there are a few frequent blunders that investors should avoid. We have some pointers listed out for you.
Getting tethered to a figure
Several investors set a benchmark price for the stock they own. This benchmark is usually the purchase price, although it might alternatively be the stock's highest point. This price will be used to make future stock decisions. Anchoring on a price level in a sinking market can cause investors to hold on to stocks for longer than they should.
Purchasing more in order to achieve the average
Everyone makes mistakes, but certain investors have a proclivity to compound their errors. If the stock you bought falls in value, don't try to lower your average buying price by buying more shares. Often, investors try to make up for their losses by purchasing more of the same stock at a cheaper price.
Falling for confirmation bias
Investors gorge themselves on investment news and research papers when their equities plummet. They do, however, seek information or signals that support their opinions, and they prefer to overlook material that contradicts their original theory. During a bear market, this confirmation bias works overtime. It has the potential to skew your perception of the circumstance and lead to a poor conclusion.
Taking risks with leveraged bets
Brokerage firms push investors to take risky trades with leverage. Margin investing and leverage can produce huge returns, but they can also result in significant losses. This type of investing should be avoided at all times, especially during periods of market volatility.
Changing your financial strategy
Investors may change their financial plans or investing strategies as a result of a severe drop in the market. Some investors may be tempted to increase their exposure to equities excessively in order to profit from the market downturn, while more conservative investors may decide to withdraw all of their funds to be safe.
Because of the decrease, SIPs are being halted
One of the most common mistakes made by small investors is to halt their systematic investment plans (SIPs) in equities funds when markets fall. This violates the SIP's entire function. During a bearish moment, maintaining the SIP discipline will help you reach your long-term objectives.
Diversifying your stock portfolio too much
Individual investors typically bet heavily on a few equities, whereas mutual funds diversify to lessen risk. When the tide turns, such intense exposure might be detrimental. Too much diversification, on the other hand, is not a desirable thing.
“During the bull run, many low-quality stocks rise; it is only during the falling market that the true resilience of the portfolio is displayed. In the last few weeks, we have seen that some of the quality stocks are also down. It may be an excellent time to buy more of these quality companies. Investors should focus on long-term investing while allocating in equities,” says Ankur Kapur, the chief investment officer and the founder of Plutus Capital.
According to studies, investors with significant assets tend to ride out of the market and are unconcerned about short-term swings, but people with lower quantities of assets lock in losses by withdrawing assets from the market during market lows.
Take a look at these trends and numbers that have resulted in a highly volatile market. In October 2021, the market reached a high of 18,604, and it is now trading around 17,794 in February. In the last five months, it has dropped many points.
Three out of every five stocks fell on a bad day for stocks, as investors worried about rising inflation, possible policy tightening, and continued overseas outflows. Over 300 stocks fell below their lower circuit boundaries, resulting in a loss of nearly ₹2.9 lakh crore in value for the day. Both the Sensex and the Nifty50 have turned negative for 2022 after this third straight session of Dalal Street decline.
Even during market corrections, making regularly scheduled purchases of low-cost diversified index funds is the wisest course of action. Small investors must learn to master rational behaviour over their instincts and avoid common behavioural blunders. The blunders that have prevented them from becoming affluent.