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How to Handle Market in Downtrend

To make money over the long term, you need to protect your profits when a downturn hits. A downturn in the major indexes tends to pull most individual stocks down with it. Therefore, it's much riskier to buy stocks during a correction and it's critical to keep a close eye on any stocks you already own.

What to Do?

Avoid making new buys. During a market downturn, the odds of success are not in your favor. You're better off waiting for the next uptrend to begin before making new purchases.

Protect your profits and cut short any losses.

Consider selling your weaker holdings. If you own a stock that is selling off and you're sitting on a small loss or at break-even, you may want to take defensive action and reduce your exposure. At the very least, follow the cardinal rule of selling, and always sell if a stock drops 7% - 8% below what you paid for it. (In a weak market, you may want to cut your losses even sooner.)

Keep a close watch on your stronger stocks. You do not have to automatically sell all your stocks in a correction. If you have a decent gain in a stock that is bucking the market trend and showing strength and resilience in spite of the overall downturn, you can certainly hold it. But be ready to take defensive action if signs of trouble begin to emerge. You could also choose to sell a portion of your position. That way you nail down some profits but maintain a position in the stock in case it does continue higher.

Set a target sell price for any stock you still own. One of the key tenets of successful investing is to never let a good gain turn into a loss. So if you're holding a stock during a correction, set a defensive sell price. For example, if you're up 20% in a particular position, maybe you're willing to let that gain drop to 10%, but no more. If the stock drops to your target price, sell. Setting the price ahead of time helps keep your emotions at bay and protect your hard-earned gains.

Prepare to make money in the next uptrend by building your watch list. During a correction, many investors get discouraged and give up on the market. Big mistake! Many leading stocks build bases during market downtrends, then break out and launch new moves right when a fresh uptrend begins. So if you want to catch those big gains, it's absolutely essential that you prepare your watch list while the market is still down.
Related:

Share Market Basics: Investing Mistakes to Avoid in a Down Market

Still the No. 1 Stock Market Tip: Always Cut Your Losses Short

Also read our last week’s article on: How to deal with IPO Frenzy?
Check out MarketSmith India for more.

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