A suitable investment plan can make money work for you. Nowadays, one of the most profits making investment vehicle is the stock market.
But while investing we must realize that stock market volatility is unavoidable. So, due to the volatility, investing in the stock market can be risky too. Therefore, before start investing we need to learn how to act during volatility.
What is the Stock Market Volatility?
Stock market volatility is the statistical measure of the market or security of rising or fall sharply within a short time interval.
For instance, during a volatile market risk of triggering stop losses both on the short side and the long side become high. Sometimes, in stock market volatility we found that investment stocks are losing value more than they deserve.
Image Source: NSE India
Consequently, several investors take a wrong step that causes terrible outcomes. But we must realize that volatility is not the cause, but it is the manifestation of the problem.
In this article, we will discuss six things that you must avoid in the stock market
1. Don’t rush to exit
It is quite natural to panic when shares are losing value rapidly in the volatile market. But, in such moments you don’t need to rush for the exit.
Due to this panic selling, a lot of investors sell their stocks prematurely and miss out a handful returns when the market rebounds. Most of the time the market weakness is temporary.
So, the first judge, exactly why you have invested in a particular stock. Then hold and wait for the shares to rebound. In contrast, if you are not sure about your investment, take advice from your investment experts before exit.
For example, in very recently market volatility has been caused due to the rupee weakness and the IL&FS crisis. As you know, both were a temporary crisis. It is not like the 2008 market crash. So, every weakness is not the signal of a bearish market.
So, when the markets become volatile, try to stick to the winners and don’t just convert everything into cash.
2. Avoid bottom fishing
In stock market volatility stocks might fall a lot. In this situation sometimes investors become tempted to do bottom fishing.
But, bottom fishing is like catching a falling knife. Experts always advised that not to pick any stocks only because they are available at low price.
It always has a risk of getting caught in a value trap. That means investor get trapped in a stock whose price looks very attractive at the time of investment. But, after that, it continues to remain low for a long period of time.
3. Don’t tempered financial commitments
Whenever you are into a monthly systematic investment plan, don’t change it just because of stock market volatility. Certainly, it will disturb your financial goals as well.
Sometimes investors stop their SIPs when the market is not performing well because of the fear. This is absolutely avoidable.
SIP (systematic investment plan) or any regular investment plan requires investing consistently. So, if you stop in midway, you will not be able to get benefits of compounding good returns.
4. Portfolio d
Do not put all eggs in one basket. – Warren Buffett
The thumb rule of investment is diversifying the portfolio. So you should not make your entire investment in individual stock. Allocate your investing capital in a way that reduces the exposure to any one particular asset or risk.
Therefore, if any of the stock faces volatility, then other investment may cover the loss. So, we must spread our assets across different sectors. Because all the area rarely performs weakly at a time. So, all your investments would not be uniformly affected in the same market event.
But, make sure that your portfolio is diversified but not over-diversified. An over-diversified portfolio may lead to minimal gains. Therefore, try to find a good symmetry between risk and return.
5. Avoid media based t
As an investor in the share market, must aware of the news and current events around the world. But, before act according to the media always judge the situation at your end sincerely.
If you take decision blindly depending on media broadcast, it may occur tremendous loss during the stock market volatility. There is no harm to be aware of breaking news, but do not invest your hard earn money only because of this.
6. Don’t invest borrowed money
Every market expert advised never to invest borrowed money into the stock market volatility as it can lead you straight into debt. Borrowing for investment is never a decision of the wise investor.
So, because the markets are at low, do not go for borrowing and investing. Even more, you could take a hit both ways. So, losses could easily multiply in stock market volatility.
Consequently, the margin investing and leverage can produce high returns. But we must remember that it also leads to a tremendous loss.
In investing when the situation is tough we must remain calm. Therefore, market experts advised to remain disciplined in investments and stick to the financial plan. It will surely lead to achieving your long term monetary goals.
Warren Buffet said that investing success is as much about Emotional Intelligence as IQ.
Before steps in the stock market, investors need to learn about the potential risks during times of volatility. Certainly, you can make investments in this situation if you’re confident in your strategy. But, never become overconfident and stay aware of how the market volatility can affect your decision.