There has been a recent downward slide in the Philippine stock market for the past few days. The Philippine Stock Exchange Index (PSEi), which is a representation of the stock market performance in the country, went down from its highest point of 7,392 to close at 6673 as of Tuesday (June 4, 2013). That represents a 10 percent slide in few days’ time.Any stock market investor would know that fluctuations such as this are not unusual. The volatility of stock prices is unpredictable. The collective sentiment of investors drives the demand for stocks but this demand is not always based on any logical reason. That’s why the real worth of a business is not always properly reflected by way of their stock price.
But when portfolios lose value, not a few investors make unwise decisions they often regret later on. With their own logical reasoning, most investors know how to react properly to the situation but their impulsiveness can sometimes get in the way of good judgment. This mistake is something investors should be aware of and ready to guard against.
I’d like to expound a little bit on how investors react to market downtrends so that we can avoid the mistakes that can result to investment losses.
1. SELL before I lose more
This is the biggest mistake for stock investors to make. If they cannot afford to keep their portfolios intact when the market is down, then they are not investing for the long haul. That is to say that they have started in the wrong footing with their investments. Although it’s natural to fear losing money, it’s important to understand that the losses are not real yet. It becomes real when stocks are sold at a low price.If an investor is forced to sell low because of necessity, then he or she did not have the right strategy to begin with. Investments should have been designed for the long-term and not something to draw from in case of emergencies.
2. KEEP to weather the downward slide
A smart investor would be wise to ignore the unexplainable fluctuations of the stock market. As long as the underlying business remains performing well with a good outlook, there’s no reason to take market movements too seriously. Otherwise, he or she will be reacting to fluctuations every now and then with disastrous results on the investment performance.Long-term approach to investing doesn’t mind the occasional paper loses. It should be expected to happen but should not force the investor to react unnecessarily. Knowing that many would exercise their poor judgment to sell upon seeing the market going down, we should expect further decreases. It’s a downward spiral made worse by those who are afraid of losing money theoretically.
3. BUY to increase stock investments
Warren Buffett (the most successful investor of them all) happily buys more stocks when the market is down. Stocks are priced cheaper in a depressed market so more shares can be bought. Instead of worrying about paper loses, investors will be better off to invest more. Take advantage of the discount you’re getting due to the downturn.Of course, investors should always take great care in analyzing the company they are investing in. Low stock prices should not be the only factor to consider when investing. But it certainly will provide the incentive to buy more than usual. And since the ultimate aim is to maximize capital, there is no better time to buy stocks than when the market is down.
Photo Credit: Mark Rain (Creative Commons)
