Stock markets continue to be volatile in the second half of 2022. The markets are facing strong headwinds from high inflation rates and the resultant monetary tightening being undertaken by central banks globally. Even the bond prices have plummeted, with yields inching towards 8%.
Poor performance of newly listed tech stocks, such as Zomato, Paytm, PB Fintech etc., have further caused wealth destruction for their investors. The continued geopolitical uncertainty over the Russia-Ukraine war, along with China’s muted growth prospects, are additionally keeping the market participants on edge.
Needless to say, many stock investors are reeling under huge trading losses in this volatile environment. While in such times, many analysts go around recommending ‘buy the dip,’ the real problem is how to deal with losses that have already been incurred. Here’s what you can do.
Analyse Your Trading Errors
Smart investors focus on minimising stock market losses, instead of eliminating them. And the smartest of the lot analyse what went wrong with their trading strategy. While it is easy to blame the market or some unforeseen event for your losses, one must ensure that the trades executed so far are indeed in line with your risk appetite. Analyse if you timed the market correctly, and if not, then what are the possible reasons for it. Find ways to improve your trading strategy and stay abreast of key market events.
Adopt Stop Loss Strategy
Investors tend to hold on to their shares even when they are suffering trading losses, in the hope of a market revival, which is an unhealthy practice. Instead, have well-defined reasons in place for deciding whether and when to sell stocks. For instance, news about poor financial performance or a lowering of target price by analysts should induce you to sell to reduce stock market losses. Have a stop-loss order on your shares, particularly on the more volatile stocks. Do not adjust this stop loss when the stock price moves lower. Always be cognizant of your position so that you know when you should exit.
Do Not Indulge in Revenge Trading
It is not uncommon to see investors overtrade, to recoup the trading losses already incurred. Panic buying will not help you recover your losses. It could, however, further worsen your trade position. Under such circumstances, you are advised to calm down and take a break. Get back into trading once you come across an opportunity that fits your criteria.
Conduct Risk Management
Since the securities markets are dynamic, it is essential that you continue to monitor your portfolio’s risk. You should ensure that your portfolio risk is aligned with your risk appetite at all times. However, some leeway can be given if your focus is long-term. You should also have an idea of the maximum amount of capital that you are ready to stake for trading. Analyse your investments periodically and introspect whether you would still buy the stocks that you are currently holding. In case the answer is in the negative, sell that stock and look for better opportunities.
Be Aware of Tax-Loss Harvesting Strategies
A tax-loss harvesting strategy is used to offset your capital gains with capital losses. This results in a reduction of taxes payable. Such strategies also create discipline in terms of not holding onto losing stocks for an extended period.
By following the strategies mentioned above, investors can ensure that they can minimise their losses and recover their capital in due time. Trading is not only about buying the right stocks, but also about knowing when to sell. Always remember to create a diversified portfolio with assets that aren’t highly correlated with each other to successfully manage your risks and navigate the volatile markets. So, if you’re still thinking of taking your first step in investing, start your process by opening a demat account!