Anyone who invests in the stock market hopes to make a hefty profit — ideally, regularly. However, the prices often move erratically, which undermines any strategy. Sooner or later, you will see your accounts lose value. A string of losses can be particularly annoying and even scary. So, is there a way to prevent it?
Unfortunately, there is no realistic way to avoid bearish markets completely. However, you can reduce the damage and frustration if you plan wisely and protect what you have. Here are five top ideas for investors in India in 2021.
1. Set Realistic Goals
Acknowledge the fact that the market does not move in one direction, and spectacular gains are rare. Even the average rates of return may be misleading. Consider this example.
Suppose you had invested $100,000 in stocks with large capitalization between 1926 and 2020. For this entire period, the average rate of return is just over 10%. At first glance, this looks impressive: in 30 years, you would have ended up with a whopping $1.84 million.
As usual, the devil is in the details. In 1931, you would have lost 43%. 2 years later, you would have gained 54%. As you can see, the dynamics are not linear. There is a mix of peaks, lows, and fluctuations. Flat return is all that matters. This knowledge will help you get through the worst years.
The logic works for any market: stocks, bitcoin, and foreign currencies. The Forextime broker instructs retail traders to be patient and realistic. You cannot expect to make a million through forex trading if you invest $10. As you gain experience, profits will accumulate, unlocking bigger goals. Patience is crucial for FX trading, even though it is less complex than stocks.
2. Distinguish Realized Losses from Unrealized
Bear in mind that the figures you see on your statement or when logging into your account are unrealized. This applies to both gains and losses. Only when you sell your holdings do they become actual. The figures fluctuate during a trading day, so what you feel is a loss could turn into profit quickly.
Suppose you had $10,000 on your account last month, and now this figure has dropped to $9,000. Have you actually lost $1,000? Yes, if you sell the investment before it regains value. Thus, keep your eyes on the big picture. Eventually, your assets will appreciate. The only condition is that you stay invested and have patience.
3. Have a Reasonable Time Scale
Your behaviour in the stock market also depends on how soon you need your money back. If you can keep it in the market for 25 years and lose 30% at some point, you could shrug off the loss knowing the asset will go up in the long run. However, if the money will be needed next year, it is easy to panic at the idea of it melting.
Before investing a cent, consider your time scale. The narrower the horizon, the more conservative your strategy should be. Depending on your perspective, the same losses may seem negligible or devastating. This means you may be likely to ignore them or give up depending on your goal.
4. Keep Emotions in Check
Emotions are your arch enemy. When your asset is losing value, you may feel like this will go on forever, which is impossible. All declines are finite. Sooner or later, the dynamics will change, and the market will move in your favour once again. As a stock investor, you have to learn to control your emotions.
When you begin to feel desperate, look back at the market corrections of the past. You will see that a few years after periods of dramatic losses, investors who kept calm were in luck again. Those who stayed in the market were able to make up for the damage.
For example, consider the period between 2000 and 2003. If you had bought large-cap stocks back then, your result would be roughly -38%. Instead of $100,000, you would have ended up with 62,000. If you kept the money in the market, you would have recouped the losses and made a profit by 2002 2006.
You cannot avoid losses in the stock market, but you may limit their size and effects. Learn to trade mindfully and focus on the bigger picture. Do not panic — whatever happens, the market will eventually rebound.