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Some People Think The Stock Market Will Fall Even Further. Should S/he Sell All Stocks?
An amateur investor makes a lot of these mistakes, our service MarketSmith India helps you keep your investments intact without falling into traps during a downtrend –
Buying before a base completes:
A base visually represents a great stock’s need to take a break. After a nice run-up in price, preferably 30% or more, such a stock will decline – in most cases, mildly. The key to making money in the market, though, is waiting until a base completes before buying. In most cases, stocks that come down to their 200-day lines do so amid signs of institutional selling. Wait for the stock to prove itself more, and look for signs of institutional buying as the stock builds the right side of the base. Then you have a legitimate base.
Keep holding a stock:
Follow a rule: If a stock drops by 8% of its purchase price, sell it, no questions asked. This type of selling requires immense discipline and it comes over time. Successful investors never let their stocks to stay in their portfolio if they drop by 8% value as it can harm their portfolio drastically.
Buying every possible breakout:
... stock charts tempt investors all the time during down markets. Some growth names will hang in there with compelling charts. A breakout may work for a while, but it will likely be short-lived. While stocks that hold up the best during down markets can go on to be the next leaders, they still should not be bought during a downtrend.
Buying low P/E ratio stocks:
If a stock has a low P/E, it indicates that the company is not performing well. It is rarely a case that a stock with low P/E will reap great benefits over time. Trying to catch a stock "on-sale" is fraught with risk. In many cases, stocks with low P/E ratios are suffering from weak fundamentals, where shrinking market share results in lower earnings growth. That's not something you want to see in a stock. An analogy could be that you cannot buy a Mercedes at the price of a Maruti.
Stop paying attention:
It is easy to lose interest when stocks are selling off, but market downtrends let high-quality names take a breather and eventually build new bases. When a new uptrend is confirmed, breakouts deliver the biggest gains. During a market pullback, try hard to make a list of stocks that held up the best.
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