Everyone does some mistakes in life to learn something new. It’s normal if you do mistakes in stock investments.
But mistakes done during the market crash may wipe out your investments. So it is better to learn what mistakes should be avoided to secure your money.
I have selected the top 5 investment mistakes that you should avoid during the market crash.
#1. No Planning
If you are investing in the stock market without a plan, you are highly prone to lose your money.
Experienced traders always enter the market with a well-defined plan. They know the limit up to what amount they have to invest and how much loss they can afford if market conditions are not favorable.
You should plan your investment strategy and then only start investing in the share market. If you play with such a plan, then your chances of losing fortunes are very low. Because you know when to add up more and where to make a stop.
Developing an investment plan is not hard. You can start by answering a couple of questions like how much money is okay to lose. You can also take help from a financial advisor if creating an investment plan is not your cup of tea.
#2. Being emotional on “losses’
What will you do if your portfolio’s value drops to a significant amount?
Stocks’ downfall is a normal thing and most of the experienced investors recover themselves from such downfalls by having a long term vision.
People who invest emotionally, they buy when the stocks are rising and sell when their price dropped, ending up losing money.
Your stocks’ prices may be down but it would affect you only and only when you would sell them.
In fact, you should reinvest your fund’s income and increase your portfolio size. Whenever the market will revive, your investments will also get revived.
Staying the course through volatility is generally the key to an investor’s success. Long term vision is required to avoid losses and earn profits from market crashes.
#3. Overreacting in Panic
When a market crashes, there’s panic all around. Some investors sell their stocks when the prices are falling and embrace government bonds or secure funds.
But downfall is not the right time to sell the stocks. Always look for the long term and even if the market crash has wiped out your investments, it won’t remain constant.
So rather reacting in panic and book losses, it is better to strengthen your research. Then you will be able to understand which business will recover the crisis and where to keep on invested the money.
Remember Warren buffet’s quote – “Widespread fear is your friend as an investor because it serves up bargain purchases”
#4. Chasing After Performance
You might want to invest in a stock that has been rising for the last 2 years. You might be having FOMO (Fear of missing out) that stock. But if you are looking at the past 2 years’ performance, that means you should have invested in that stock 2 years ago.
If you will invest based on past performance, you are likely to lose your money because you never know if the stock has reached its threshold and now it may fall anytime.
So the best strategy to avoid such mistakes during the market crash is understanding the business of a company and then investing in the right business.
#5. Avoiding Stop-Loss Orders
If you are not using stop-loss, that depicts that you are not trading with a plan.
Stop-loss option is highly valuable especially when the market is volatile, it may limit losses due to any sudden downfall in the stock or in the whole market.
Stop-loss executes an order if a particular stock hits a specific price, thus avoiding more loss.
For example, you have a long position on 10 shares of Tesla Inc. (TSLA) that you have bought for $500 per share.
The shares are now trading for $540 each. You want to hold the stock to get the benefit of future price appreciation. But you don’t want to lose your gains that you have built up so far with the stock.
In your analysis of company data, you think that if Tesla’s price may dip in the near future. You decide to sell out of your position if TSLA shares fall to $520 so that you won’t lose much. You put a stop-loss at $520, whenever TSLA shares will reach that number, it will be sold automatically.
The Bottom Line
These are some common mistakes that people make and lose their hard-earned money. You should be cautious about every step in the stock market especially when the market is crashing or highly volatile.
Keep a long term vision and strengthen your research to make market crash favourable.