Over the last couple of years, midcap and small cap stocks have fallen significantly. The benchmark indices like sensex and nifty had fallen sharply since the Finance Minister presented the Budget 2018 in parliament on 1st February. The market sentiments were badly hit by meltdown in global market and change in long term capital gain tax. What should be avoided in such backdrop?
1. Getting anchored to a price
Investors usually set a benchmark price for their shares. This benchmark is usually a purchase price but this could be highest price touched by stock. In the falling market, investors hold on to stock longer than they should. When the price has dropped, find out reason for that drop. If there are justifiable reason corporate governance issue, deteriorating balance sheet then it is better to cut off your losses and exit.
2. Buying more to average
Everybody makes mistakes, but some inventors tend to cover that mistake by purchasing more shares at lower price. Averaging can be beneficial only when the stock’s fundamental are strong. However if fundamentals are weakened, then in such cases the averaging is like catching a falling knife.
3. Buying at 52-week low prices
Falling market turns some investors into value pickers. Some investors see opportunity in it. But such opportunities may turn out to be value trap. First, it is very difficult to identify when a stock has bottomed out. As some investors say, the market can remain irrational for much longer than you can remain solvent. Hence the 52 – week low may become mistake if used in isolation.
4. Altering financial plan
Investors usually alter their financial plan and investment strategy when market is falling. Investors should not base their investments decisions on the prevailing market mood. Instead of jumping to other investment plans or strategy, investors should focus on long term objectives and stick to a well defined financial plan.
5. Taking leveraged bets
Brokerage houses usually encourage investors to take leveraged bets. Margin investing and leverage can help you to get high returns, but it can also lead to huge losses. When market is volatile, then this kind of investing should be avoided.
6. Over diversification of stock portfolio
Diversification helps to reduce risk, but over diversification is not good. Some investors may try to reduce the risk by spreading their money across various sectors and companies. Diversification is essential to a certain limit. Beyond that it will not reduce the risk further. Also, you will find it difficult to monitor a large number of stocks.