Many investors come undone when the stock market drops or during a correction. Everything you’ve learnt sounds good in theory, but sometimes it’s hard to act rationally, especially if you’re facing a potential market crash.
Let’s take a look at the top mistakes you must avoid in situations like these. Having this knowledge will mean you don’t have to learn things the hard way.
Reasons the stock market might drop
The market could lose value for a whole heap of reasons.
Sometimes, it’s actually healthy for the stock market to take a breather and retract a little bit. This is known as a stock market correction. Corrections are dips of around 10% or more. Market crashes tend to be bigger and faster drops.
Prices can fall for business-related reasons or wider economic circumstances.
Although there have been plenty of ups and downs, the market rollercoaster has always ended up in a more positive position. Here are four mistakes to avoid when inevitable market drops occur.
1. Checking your portfolio regularly
During downturns, there is often lots of volatility. If you keep checking your portfolio, it’s just going to add unnecessary stress into your life. Investing apps are great, but checking prices regularly will start giving you crazy ideas like trying to time the market.
These temporary price fluctuations shouldn’t affect your long-term investing plan. The best thing to do is to be patient and wait out these volatile periods. There’s no useful reason to keep checking your portfolio’s value when the stock market drops.
2. Stopping your regular payments
When the market drops, continue to invest as normal. Don’t leave your money on the sideline because you want to see how things play out. It’s often during recoveries that the greatest gains are made. Pausing your investing schedule could mean missing out on these rewarding upswings.
If anything, it can sometimes be worthwhile to increase your payments during drops. This is because you can get more value for your money. However, you should only do this if you have spare disposable income that’s not needed elsewhere.
3. Selling your investments
Losses only become real when you sell investments. Otherwise, it’s just numbers. By holding onto your investments, you’re not actually losing anything. When the stock market drops, it’s the people who sell investments that lose money.
Plenty of people make their money from investors who buy high and sell low. You can avoid falling into this trap by not trying to time the market. Things can change very quickly and anyone who tells you they know exactly what’s going to happen is telling porky pies.
4. Diverting from your plan
This last mistake ties in everything discussed above. Create an investing plan with a diversified portfolio and then stick with it. If the market drops, it shouldn’t alter your strategy. The market will go up and down regularly and it’s the investors who stay patient that come out on top.
When creating your investing strategy, keep in mind that there will be good times and bad times. Although some lessons can be learnt from day trading, investors should really be in the market for the long run. Stick to your guns and don’t get caught up in all the market movements.
Keep steady if the stock market drops
The best chance of successful investing is sticking with your plan. Make sure you use a share dealing account with low fees because these costs will build up over an investing lifetime. Remember: what happens from day to day shouldn’t impact your strategy.
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