Wary of market selloff? 5 mistakes investors must stay away from

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Wary of market selloff? 5 mistakes investors must stay away from

 Wary of market selloff? 5 mistakes investors must stay away from
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Highlights

  • A market selloff is one of the most feared phenomena for investors.
  • It can lead to substantial losses for them.
  • However, it’s possible to save your funds from getting wiped out in such a scenario.

Market selloffs can be a challenging time for investors. It is one of those times when very few investors have a clarity on how to proceed and protect portfolios from losses. This is also a time when investors make some errors that ultimately cost them their hard-earned money. However, it’s not that tough to manage your funds during a selloff. It just requires a bit of patience and a good investing strategy.

Here we discuss five mistakes which ASX stock investors should avoid during a selloff: 

Resorting to panic selling

Stock market investing is mostly about patience. Investors should remain calm and composed, no matter how challenging the market scenario is. Unfortunately, investors, especially newbies, forget the rule and resort to panic selling during selloffs. Such a behaviour only gives rise to further negativity, which can stay for a long time in investors’ psyche. It is always advisable to separate emotions from the investment decision-making process. Just remember - “Tough times come and go, but tough people carry on”.

Sitting on cash for a long time 

It is one of the secondary effects of panic selling. Investors collect a lot of cash during panic selling and hesitate to put that money back into the market again. This way, they lose on the gains, which are there to be made when the market rebounds.  In case, you are finding it difficult to time the rebound, you can go for dollar-cost averaging. Using this investing technique, you can purchase fixed amounts of stocks at a regular period to get back into the market gradually.

Ignoring the importance of diversification 

Experts always advise to have your investment portfolio spread among stocks, bonds, cash, and other assets. However, diversification should be carried out with caution. It should depend on risk tolerance, time horizon, goals, etc.

It is critical to understand that one diversification strategy cannot be applied to all as every investor has a different mindset, risk appetite, goals, and strategy. Thus, each one should chart out a strategy that suits his/her needs and expectations.

Overconfidence  

There is a set of overconfident investors who overestimate their ability to judge the movement of a stock. These people even bypass the advice by experts to tread carefully during a selloff. As a result, they end up with their portfolios in disarray and even deeper losses. Profiting from short-term trading is actually lot more difficult in practice than it appears.

Trying too many moves

It is advised to play dead during a selloff just as you would do in case you met a real wild bear in the woods. In financial terms, playing dead refers to putting the larger portion of your investment portfolios in money market securities, such as bonds. Those investors who try many moves during a selloff end up with losses.

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