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What to do and what not to do in a falling market

A market sell-off can be brutal. It is disheartening to see your investment portfolio dwindle when the market nosedives. Panic, fear, anxiety, desperation: these are common feelings that you are bound to go through. The urge to join the rest to sell off your stocks to salvage your financial position may be overwhelming. But what if we tell you that doing something like that would be the most damaging thing to do to your portfolio? So how do you deal with such jittery market situations?

We have listed a set of dos and don’ts that you need to consider in a falling market.

# Don’t panic

Everyone is aware of the tale of the Pied Piper of Hamelin, who enticed all the rats in the village by playing his pipe. The herd mentality in the market is similar – whether it is while buying or selling stocks. Just because many investors are dumping their stocks, don’t give in to selling. Panic selling is a reaction to the overall pessimistic market sentiment. Instead, hold onto your stocks and re-evaluate the situation.

# Go bargain hunting for good stocks

In a bearish trend, the stocks of both good and bad companies tend to go down. The flipside to a falling market is that it opens up the opportunity for you to take advantage of the situation and buy into good stocks that you have always been eyeing. Generally, market dips are times when fortunes are made.

# Don’t try and time the market

As a long-term investor, you need to manage your stocks so that you can maintain them for years to come. Don’t constantly lookout for stocks so that you can buy them on dips. Instead, keep a practice of regular investing over time as it will yield better returns.

# Review your asset allocation

Take a good look at your portfolio and review the stocks you own. Usually, stocks with good fundamentals will be able to withstand the market carnage. Even if they correct a bit, they will be able to spring back into action. At certain times, different sectors perform well, even during a market fall. So, it would be prudent to diversify your portfolio and apply a sector rotation approach.

# Go short on bad stocks

You may be holding on to some bad stocks in your portfolio, which have been performing dismally. During a market fall, such stocks are the worst hit. This may be the perfect opportunity to go short on such stocks.

# Be patient

If time is on your side, being patient is the best way to make money in the long term. So, don’t sweat at every bear market. Good stocks usually emerge out of bear markets and are ready to rally in the subsequent bull market. So don’t be in a rush to exit any stock. Keep monitoring the company fundamentals, and if they seem okay, then it is best to hold the stock as it winds through the peaks and troughs.

# The bottom line

Historically, bear market phases have shorter runs than bull markets. For inexperienced investors, it is critical to know what to do when stocks go down because a market crash can be traumatic. In any case, panic selling is not the solution to a market fall. You need to realise that market dips are all part of the process. It is essential to analyse your risk tolerance, your investment horizon, and most importantly, educate yourself on stock market risks.