Hold on to your hat
In the midst of market uncertainty, it is good for the investor to hold on to his hat and accept the nervousness of the market. Incorrectly timed purchases and sales can very easily destroy multi-year returns.
What to do if the stock exchange plunges into a sharp decline?
A sharp decline in the stock market may arouse uneasiness. A downward trend in the market will affect sooner or later everyone who invests in equities or funds. What should I do?
1. Don’t attempt to buy and sell just at the right moment
It is difficult to buy and sell at the right time mainly for two reasons.
a) You begin to see patterns that do not exist
We are masters at seeing different kinds of patterns. We may see patterns in the historical price trends afterwards, but, in fact, these movements are just as unpredictable as a pure coincidence. We often hear stories about how someone has managed to buy or sell at an opportune moment. Still, more often, the trades have gone completely wrong.
b) Emotions get in the way
The decisions we make are largely based on emotions. It is therefore hard to sell when you are on top and feeling optimistic and, then again, when the bottom has been reached and you are bowed down by pessimism. It is highly likely that your emotions will make you sell exactly at the wrong time when the share prices have already started to fall again and everyone is frightened. Similarly, you buy far too late when the stock market has picked up and investors have resumed their bullish mood.
2. Stretch your investment horizon
As long as the money market is performing well, the wisest thing for you to do is to invest in funds regularly regardless of whether the markets are strong or declining.
In the long term, regular saving will provide you with better potential for obtaining a positive return on your investments than any attempts to sell or buy just at the right moment. If you save regularly in funds when market prices are dropping, you will obtain fund units at a cheaper price. This is how you can buy a fair share of the funds and then obtain returns on them as the market rebounds.