No one wants to lose their hard-earned money in stock markets. Thus, whenever the market starts correcting, everyone gets nervous. Even the most patient ones with nerves of steel, start checking their portfolio in a fall. The worst affected by a crash are those who have simply put their money without a goal or a strategy. Every distraught emotion starts appearing on their faces as they desperately look to exit from their positions anyhow. Many rushes to join stock market study courses thinking that they will get an exit plan.
The stock market often becomes volatile, and this panic is common and normal. It is totally fine for an amateur investor to panic. But to make decisions emotionally instead of using logic will simply be throwing buckets over your hard work and patience.
So, what should one do?
Anybody who has got experience backing them will say that markets can’t be timed to perfection. We believe this to be true as no one could predict the date and time of a crash or correction. Not even experts who curate the best stock market courses online. Though it doesn’t imply that we can’t do anything to protect our profits in investments and trades.
The first step in this journey is to segregate your trades from your investments. The majority of the amateurs are often confused about their investments and trades. This is because, what’s not given profit to them, becomes an investment for them. This is a completely wrong step, as the long-term perspectives weren’t checked in the process. Now, let’s check out the right steps:
- For traders:
If someone is trading and the market starts correcting, getting their stop loss hit will be the obvious case. This happening is fine and there’s no need to panic in such situations. An Intraday trader isn’t much affected by corrections as he /she can always go with the short positions. It is also noteworthy that in a correction, not everything will fall. There will be sectors that will be unaffected and growing, in the correction. There are no issues in going bullish on these sector companies if one’s taking positions with a stop loss.
If anyone has initiated a short position with an SL, that might prove to be an ace stroke. Though to do that, one needs to have proper exposure and experience as they have to tread into the derivatives domain. Though going for Protective Puts pure option strategies will be less risky and provide good hedging for their long positions.
- For investors:
This group of stock market people are most affected by the correction as they start panicking and worrying about losing their profits and getting into losses. During market corrections, selling off your investments is not always a good idea. One must only sell if their goal is complete or they haven’t invested with a strategy or at the right price. Unfortunately, newbies end up selling their investments in a good company to conserve short term profits, instead of buying more in a crash. Negative news such as international conflicts or pandemics, or statements shouldn’t disturb your psychology.
It is important to understand that market can’t always tread higher and higher like a straight line. It will correct and consolidate and then resume its trend. It is evident in history, as charts comprise short- and long-term corrections. But after every downfall, it rebounded, grew and made new highs as it always goes up in the long run. If one exits their investment in fear or panic, they soon realize their mistake of exiting the game early.
Importance of Psychology
Psychology is the distinguishing factor between those who invest and trade without knowledge and one who has completed a professional stock trading course. Because of wrong psychology, the majority of unaware investors are wiped out of the markets. A stock market course doesn’t teach you something extraordinary, but rather empowers you to take your decisions based on logic and strategies, not emotions. When people execute their trades and investments through strategies, patience and calmness start building, automatically.
Thus, even when a correction arrives, those who have completed the best stock market courses online remain calm, as they wait for either their target or SL to get hit. They remember the fact that markets never go in the same direction for the entirety. An experienced person will utilise this time to do one of the following two things:
- They will be utilising the opportunity of the crash to accumulate more quantity into their portfolio. The stocks will be available at a heavy discount. They’ll be found as the greedy ones when everybody else will be in fear. Some of them might be doing portfolio rebalancing and rearrangement.
- They’ll be utilising the time to carry out a fundamental analysis of prospective businesses before considering the investment. They’ll also look for the market cycles to identify which companies, might boom in the correction.
Tax-loss harvesting
The profits someone earns after selling their long-held stocks or mutual funds are called capital gains. Whenever somebody books these capital gains, a tax of 15-20% is levied on the profits. A fall in markets is the best opportunity to save this tax liability through tax-loss harvesting.
It is a process in which one sells loss-making stock so that taxes on gains and income can be offset. It is a very effective way to reduce your tax burden and increase the post-tax returns on your investment. Generally, this strategy is used at the end of the financial year, so the same stocks can repurchase the next final year. This strategy can be used at any time during a financial year.
Asset allocation and Portfolio Rearrangement
A correction is a perfect opportunity to rebalance your portfolio and allocate money to different assets. When markets correct, risk adjustment through changing the weightage of debt instruments is done. Many fundamentally good stocks are also available at a very lucrative price, so it is the right time to in0crease held quantities and invest in new ones. When people carry out asset allocation at the right junctures, it helps in reaching their desired financial goals faster. Introducing exposure to gold in the portfolio risk is also a good idea to tackle volatile markets.
Bottom line
Stock markets are for those who have a stable emotional mindset. Those who panic at the time of correction only lose their money to the smart people. By taking logical decisions after completing a share market learning course, investors and traders can take advantage of the high volatility in the market. A market correction provides ample opportunities for people to make the best decisions about their working style and systems. As quoted by Warren Buffet sir- “A market downturn shouldn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”
