It would help if you protect your profits when a downturn hits, to make money over the long term. A downturn in the main indexes tends to pull-down most individual stocks with it. Therefore, it is riskier to buy stocks during a correction, and it is critical to keep a close watch on any stock you already own.
What should you do?
- Avoid new purchases
During a market downturn, the chances of success are not in your favour. Before making new purchases, you are better off waiting for the next uptrend to start.
- Protect your profits & cut short any losses
- Consider selling your weaker holdings. If you hold a stock that is selling off and you are sitting on a small loss or at break-even, you may desire to take defensive action and reduce your exposure. At the very least, follow the cardinal law of selling, and always sell if a stock dives 7% - 8% below what you paid for it. (In a weak market, you should cut your losses even sooner)
- Keep a close eye on your more reliable stocks. You do not have to sell all your stocks in a correction automatically. If you have a decent profit in a stock that is bucking the market trend and displaying strength and resilience despite the overall downturn, you can certainly hold it. Nevertheless, be ready to take defensive action if signals of trouble begin to emerge. You could also choose to sell a part of your position. That way, you nail down some gains but maintain a position in the stock in case it does go higher.
- Set the target sell price for any stock you still hold. One of the fundamental tenets of successful investing is never to let a good gain turn into a loss. So if you are holding a stock during a correction, set a defensive sell price. For example, if you are up 20% in a particular position, maybe you are willing to let that gain drop to 10%, but not more. If the share drops to your target price - SELL! Setting the price in advance helps keep your emotions in check and preserve your hard-earned profits.
- Get ready to make money in the next uptrend by developing your watch-list
During a correction, a lot of investors get discouraged and give up on the market. Big mistake! Many leading stocks build bases while market downtrends, then break out and launch new moves right when a fresh uptrend begins. So if you want to catch those significant gains, it is absolutely critical that you prepare your watch-list while the market is still down.
For more information on how to invest in stock market and stock market tips, visit www.marketsmithindia.com.