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Friday, February 19, 2016

Why you Shouldn't Sell after a Stock Market Crash

Many small investors buy unknown 'cheap' stocks near stock market peaks. When the eventual crash comes, they are left holding their dud stocks because there are simply no buyers for these at lower prices.

Eventually, the stocks are sold off near the stock market bottom as investors try to salvage whatever they can. This phenomenon gets repeated in every bull-bear cycle.

Why does this keep happening? Because small investors get lured into the market by all the media hype during a bull phase. They expect to make quick gains without doing any homework about how the stock market functions and how to choose stocks based on fundamental and/or technical analysis.

They end up choosing stocks with weak fundamentals that appear relatively 'cheap' and are flying high due to mindless buying during later stages of a bull phase.

Is there a simple solution to the problem? Yes. Instead of buying first and then getting into trouble, seek guidance from a market veteran before buying.

It also helps to plan beforehand. That means taking stock of your present and likely future financial commitments, having the discipline to save first and spend later, and investing your monthly/quarterly savings according to an asset allocation plan.

What if you have done all that and still get caught unawares by a sudden market crash? It is very difficult not to panic when you see your hard-earned money going down the drain almost daily.

If you have done your planning properly and chosen good stocks from fundamental and technical points of view - don't sell in a panic.

A bear market is almost always followed by a bull market. Sometimes a long period of consolidation may precede the next bull phase. You have to learn to take such situations in your stride.

Your asset allocation plan will guide your decision making at every stage of a bull-bear cycle. Just have the patience and discipline to rely on it.

What if you are one of those unfortunates who bought 10000 shares of Suzlon at 25 on an impulse - only to watch the stock price drop to 13? Well, you have just learned four (rather expensive) important lessons:

  1. Never buy a junk stock - even if you do, buy 50 or 100 shares to test the waters but never in bulk
  2. Never buy on impulse - always do your due diligence before buying
  3. Always maintain a stop-loss when you buy - it will save you from a big loss
  4. You could have asked me before buying; a simple email would have saved you a lot of pain.
Here is a link to an article in investorpedia.com that gives 3 reasons for not selling after a market downturn.

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