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As businesses are grappling with the constraints emerging due to the pandemic, share prices are witnessing a sharp decline. A large segment of market investors believes in investing in the stock market when prices are falling. They owe this logic to the simple mantra “buy low, sell high.”However, it is not advisable to chart out entry points just because the market is falling. Let us explore this thought in detail.
Invest, do not gamble
This is the first and foremost rule that both new and seasoned investors must keep in mind. Even though a fall in share prices may seem to entice you to invest, it is important to take a step back and realise that the point is to invest and not gamble.While investing involves strategic decision-making and taking calculated risks, gambling entails wagering your capital on certain speculations and not adopting any risk-mitigation strategies. In these unpredictable times, no one knows what tomorrow looks like. Therefore it is better to stay clear of baseless speculations and avoid taking emotionally-driven decisions,
Identify well-performing sectors and companies
Investors must consider researching and identifying well-performing sectors and companies. There are some sectors that see a boom even when markets tank. Also, there are some sectors which are expected to bounce back soon after markets recover. For instance, companies connected with the digital world and providing services which enable digital - entertainment, work and office system, etc. are expected to do well during the COVID-19 crisis.
Don’t lose sight of your financial goals
Most importantly, investors must remember that there is no point in losing sight of their financial goals. If your primary financial goal for investing is to build a retirement fund and you are just a few years shy of retiring, then it does not make sense to invest in equities and exposure your savings to the volatility of stock markets. Do not invest just because the market is low. Always have a well-defined financial plan and set financial goals in mind.
Reassess your risk profile
Falling market prices is an indicator of the overall performance of an economy. When the overall economic scenario is on the decline, it, in turn, affects other investment avenues, businesses and profitability. This calls for a re-evaluation of each and every investor’s risk tolerance. If at such a time, your risk tolerance should be ideally low but you make a mistake in assessing your risk profile, you may take incorrect investment decisions.The bottom line is that it is not always advisable to invest just because the market is falling. Pro Tip: If a stock is trading at a lower price which implies undervaluation, it does not mean that it is a quality stock.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
