It is difficult to avoid feeling jittery when share prices fall. Investors tend to panic, which can cause people to make mistakes. So, here is a low down on what investors should do when they see share prices tanking.
##How To Tackle The Fall In Share Prices
Even the steadiest markets and shares witness volatility. Share price drops may be caused by several reasons, such as a global economic downturn, natural disasters, geopolitical events, and much more. Successful investors accept the volatility and learn to ride it out by adjusting their perspectives and portfolios. Thus, investors should remain calm.
Sharp downward movements can be an opportunity for investors to purchase more stocks. Buying low could set investors up for future gains. At the same time, investors should not resort to panic buying. They should invest according to their risk tolerance, for one. They should avoid equity investments that fall far beyond their risk tolerance level.
Investors should assess how a price drop affects their overall investment plan. They should have invested in the stocks with a good idea of what they wanted that stock to do for them. As long as that stock still fulfils its purpose according to the investor’s plan, there may be no need to make any changes. However, in some cases, a loss could be inevitable. The investor should understand why that share price is dropping, especially if the rest of the market is doing well. If there is an indication that the company might not rebound, the investor will need to accept the loss. They can consider getting a ‘stop loss’ order at a prefixed rate to limit their losses.
Small investors may sometimes stop their systematic investment plans (SIPs) when the markets are in a downturn. This defeats the purpose of SIP investments. Sticking to the SIP during a downturned market will help achieve long-term investment goals, dollar-cost averaging, and compounding. Units can be bought at lower prices, and the benefits reaped when the market eventually recovers.
When there are sharp price drops in shares, it might be time for investors to rebalance their portfolios. The prevailing mood should not sway investors. Instead, they should look at their portfolios and make decisions based on asset allocation. Knee-jerk changes to the portfolio should be avoided. Investors should assess their portfolios and set a target allocation for each asset class. The impact of the price drop on each asset class should be analysed, and accordingly, investors should buy or sell to reach their asset allocation target. It may be better for investors to rebalance their portfolios once the markets are more stable.
While share price volatility can benefit investors, they should also have an emergency fund when the stock market falls. The emergency fund may be used to tide over difficult times rather than sell assets at a loss that later may not be recouped.
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