5 blunders to avoid when stock markets fall

The current downswing in the share market -- only yesterday the benchmark BSE Sensex tanked 546 points --accompanied by a climate of pessimism calls for not just shrewdness in share dealing, but also for avoiding the five common blunders that I find most long term investors make during a share market fall.

It is true that your precious savings needs to be protected. That makes me quote Ayn Rand: Wealth is the product of man's capacity to think.

Unveiling the 5 common blunders to avoid in stock market fall.

Ramalingam K, an MBA (Finance) and Certified Financial Planner, is founder & director of Holistic Investment Planners (P) Ltd (http://holisticinvestment.in)

I have always advised young investors investing for long-term capital gains not to panic if the value of their shares came down rapidly in just a year. It is not advisable to sell them to avoid further dips.

A strong unchangeable fact about the share market is that it is subject to ups and downs. The price of the shares would rise all of a sudden, and selling would only make it difficult to recoup your portfolio to meet your long-term financial goals.

The share market is like a voting machine in the short run and weighing machine in the long run, hence long-term capital creation requires buying shares in an advantageous share market.

Short selling (selling at a higher price and buying again when prices fall) shares at a higher price, in the hopes to replace them by buying at a lower price proved risky for many investors. They all have soon realised that it was always better to have a cotton shirt on their back rather than aspire and fail in getting a silk shirt and have no shirt at all.

People believe that investment experts and large stock broking houses can predict the market. If we watch and follow them we will be able to make quick bucks in short selling and futures and options trading.

Is that so?

If there are investment experts who will be able to correctly predict the market they will not be writing or giving interviews about it in the media. They will be silently investing and making money without revealing their secret.

Most of the big names in the stock broking sector were opening more new branches in the upcountry side during the second half of 2007 (when the market was moving closer to 20,000 levels), expecting the market to go up further and hence to grow their businesses. But within six months, market had collapsed.

In the second half of the 2008 these companies decided to wind up their newer branches in the upcountry as they were expecting further downside. But again within next six months market started their recovery.

Moral of the story: Never enter into shorting deals during a share market fall, but to hold on and invest more if you can make good returns in future.

Market has fallen. You can invest now. Many investors fall prey to the idea of investing in penny stocks (Stocks that cost less than Rs 10 a piece). You may think that you will get more number of shares when you buy penny stocks. Because you will get very few shares for the same amount if you choose to invest in large or midcap companies.

It is a known universal fact that investing in thriving longstanding companies rather than, a less known company would guarantee you a good return in the long run. You should avoid investing a large sum in unknown penny stocks.

It is always advisable to take calculated risks and not blind risks. By investing in a penny stock you are taking a blind risk which all successful investors avoid consciously.

When the market falls, that is a perfect time to start investing. Don't wait for the markets to bottom out (the lowest point after which the stock market index starts rising again). It is difficult to identify the bottom and invest. By the time you recognise, that is the bottom level, the market could have bounced back.

Share market commentaries in the media always confuse investors.

When the market was at 20,000 levels during December 2007, everyone in the media predicted the possibility of the market kissing 30,000 levels. But markets crashed subsequently.

When they came down to 8,600 levels during November 2008, everyone in the media predicted the possibility of market going down further to 3,000 levels. But markets bounced back.

Any prudent and smart investors understood this and started investing when the markets started falling. They have staggered their investments over a period of time. They followed simple strategies like systematic investment plan and systematic transfer plan.

Some young and middle aged investors invest in high return portfolios with a lot of mid cap exposure, and realise that their portfolios have fallen 15 to 20 per cent with a share market fall in just 3 to 4 months.

Their panic and decision to sell their shares for reinvesting the same in fixed return investments like bank deposits or company deposits is wrong, and I would have advised them to just wait. Their loss and reinvestment in fixed deposits would take them longer to recoup the capital and make sizable returns.

The solution lies in sticking to your share portfolio and buying more shares intelligently for long-term wealth creation.

The final word

My final word of advice for long term investors is to never allow emotions or short term fluctuations alter their investment decision, and to always buy in a falling market. I am sure a rational decision accompanied by safe dealings can make your long term financial goals a reality.