One thing that confounds me about the current market sentiment is that the market fall itself is only 20% or so, which is a lot less than the one we witnessed in the last crash but the panic seems to be at least as much as the last time.
One reason for that is the people who “play” the market generally invest in mid – caps, smaller caps, penny stocks and other momentum stocks, which have obviously fallen a lot more than the broader indices.
The two common reactions to such falls are either booking losses, and shunning the market completely, or to average down your purchase by buying more of the same stock.
Both of them are bad ideas, but averaging down on penny stocks or companies with bad fundamentals is worse than shunning the market altogether because you are throwing good money after bad.
I’ve always been wary of averaging because most of the times it becomes a good excuse to hide losses, and I think this is especially true if you hold a penny stock, or some other lesser known small cap that has fallen quite dramatically.
Ultimately, you want to invest in whatever you feel will grow the most from this point onwards and not what has fallen the most already!
This is another one of those easy to say – hard to do things, and I’m fully aware of how difficult it is to actually execute because I’ve faced it myself.
I think a big part of getting over this feeling is to acknowledge that you will make mistakes in picking your stocks like everyone else, and get on with it.
Some people take these losses personally, and their ego hurts, but they overlook the fact that everyone makes mistakes and gets it wrong some of the times. You won’t find examples of mistakes among your friends and relatives because they don’t like to talk about it, but if you look at the portfolio of any active mutual fund – you will find stocks that haven’t performed well, and that clearly shows that even professionals make mistakes.
If you start from a position where you say to yourself – you are going to be wrong in some of these calls – it’s a lot easier to deal with it after such an event occurs.
If you find yourself in the situation I described above, this is also a good time to assess whether in fact it makes more sense for you to invest in diversified mutual funds rather than taking stock positions directly.