It’s a tough time on overseas share markets at the moment and everyone is poised to see how it will affect our local market. Prices on the ASX often respond to what’s happened in New York, Japan and Europe overnight.
So what should you do when the overall market or the price of a stock you hold suddenly takes a tumble?
Here are some golden rules to help you through tough short-term market fluctuations
1. If you follow the herd you will step in @#$
Making the decision to sell just because everyone else does is the worst mistake any investor can make. Share markets all around the world are fickle and volatile by nature. The market may fall 2% today and recover and surge ahead by the end of the week. Traders and synthetic securities like CFDs can accentuate short-term fluctuations leading to across the board panic for no good reason. Sit tight if you possibly can.
2. Paper losses are not real
No one wants to see the value of their shares fall below what they initially paid, but even a sudden “paper loss” is not necessarily a sound reason to sell. Remember, you’ve only actually made a loss if you sell the shares. If you don’t place that order to sell, the loss is not realised and, depending on the fundamental value of the stock, it may have excellent chances of regaining any lost value and surging ahead.
3. Remember what made you buy the stock in the first place
If you’ve purchased a particular stock for the right reasons you won’t be fazed by a short-term drop in its price. If its underlying value is sound with good potential for future growth, a good PE ratio and healthy dividend yield, you have every reason to keep the faith and maintain your belief that it will be a long-term winner, irrespective of what happens on far off foreign markets while you’re sleeping
4. Buy in gloom, sell in boom
If the market has fallen, the opportunity to sell and make some quick profits has passed and you may be better off looking for buying opportunities. It is during market corrections that the prices of extremely valuable stocks gets pushed down and can be purchased for a steal.
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