Educating Investors

Why long-term investors should never sell stocks in a panic3 min read

We have seen some massive market crashes in the last two decades, the Stock Market Crash 2008 and now the market crash due to the Pandemic of 2020. Investors who endured in these difficult times and stayed invested were the ones who got the best returns. 

We should accept the fact that the market crash and economic slowdown would never go away, but we must always stay consistent in our investment and do not allow our emotions to come into play while investing.

The reason being after every dark night, there’s a brighter day waiting for you. We have seen this after every decline in history (no matter how severe they may be) investors have recovered their losses and market have seen positive growth over the long term.

At these times you must not forget the quote of the famous investor Mr Warren Buffett which says “Be fearful when others are greedy and greedy when others are fearful.”, these times can be great opportunities to buy more at low prices rather selling your stocks at loss.

Let us look at some of the reasons why long-term investors should never sell stocks in a panic:

  1. Why not sell in a panic: Investors plan their investments for their retirement or their financial goals, this wealth generation starts by investing regularly and with the effect Power of compounding coming into play. The most common reason for panic selling is mistrust, at this time one should always remember that market is cyclical in nature (Read more on Market Cycles here), nobody can prevent the movement of stocks, but a downturn is always temporary. In this situation, one should think like a long term investor who knows that the market and the economy will recover. Even during this Pandemic, BSE Sensex went down up to 25,981.24 on 23rd March 2020 its all-time low and now in the month of September 2020, it have recovered back to the same position where it was in the month of September 2019.
  2. The effect of Power of Compounding: Compounding is nothing but the interest earned when interest payments are reinvested, particularly in the context of stocks. The idea is to stay invested as much as possible, frequent selling or buying or selling the stocks in panic would not help to grow your wealth.  Refer our article on Power of Compounding to know more.
  3. The Margin of Safety: Margin of Safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value. In simple terms, when the market price of a security is significantly below your estimation of its intrinsic value, this difference is called the margin of safety. Long term investors should buy the stocks as per the margin of safety, this gives them the safety in accordance with their own risk preference. Refer our article on Margin of Safety to know more. 

Summary

By picking the right strategy of following the margin of safety, good research and discipline in investing one can easily beat these market fluctuations and can create a huge wealth in long term. And if you have a long-term investment strategy, you’ll be far less likely to follow the panicking herd over the cliff and will keep your emotions at bay during these situations.
Instead of fear-based selling, one should use a bear market as an opportunity to buy more – accumulate shares at deep discounts in and allow yourself to diversify, building a more stable base for when thing’s eventually do turn around.

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