Reacting to share price fluctuations will cut your investment returns


If you let share price fluctuations dictate your buying and selling, you’re almost certain to lose money.

Stock prices are volatile and share price fluctuations occur constantly. Stock market movements also have a large random element to them. It’s all too easy to read some predictive quality into them that really only exists in the investor’s mind. A rise that seems “too far and too fast” may lead into a slower but longer-lasting rise that goes on for years.

Here are common errors that can occur when investors follow share price fluctuations too closely.

  1. Becoming more “bullish” or optimistic because stock prices have gone up. Some investors only feel safe buying stocks after prices have risen. Yet this is the opposite of the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up.
  2. Becoming more “bearish” or pessimistic because stock prices have gone down. When other investors sell and drive prices down, you may wonder if they know something you don’t. But that doesn’t mean you should act hastily. Random influences may be at work.

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Here are the best ways to stop reacting to share price fluctuations:

  • Learn all you can about your investments. Visit the web sites of the companies you invest in regularly. Get on their mailing lists, and read their quarterly and annual reports. Ask your broker for research reports. Read the business news every day. You’ll be less liable to be caught off guard by price fluctuations
  • Get to know the industries. In addition to getting to know the companies you invest in, you should also get to know the industries that your stocks operate in. Some industries are more volatile than others. Knowing market sector share price fluctuations can alleviate anxiety and build confidence in your investments.  
  • Beware of advisor failings. Some advisors are “permabears”—perpetual pessimists. Other advisors are blind to risk, so their stock market advice is just as suspect. They frequently recommend investing in speculative stocks at outrageously high levels. Advisors want you take action—it makes them money.
  • Take a broad view. Consider earnings, dividends and other factors in making decisions. They matter far more than short-term stock-price trends. Stock prices rise and fall. That means capital losses can follow capital gains. But strong dividend stocks like to ratchet their dividends upward over time. Even during market downturns, the last thing a well-established company wants to do is lower their dividend payout. When times are good, strong companies will raise their dividends.
  • Invest consistently. Don’t follow a strategy of trying to buy at the bottom or sell at the top. (As the legendary investor Bernard Baruch said, “This can’t be done, except by liars.”) Pick out a selection of well-established companies, and invest gradually over a period of years. Plan to hold indefinitely. You can always change your mind and sell if fundamentals deteriorate or your needs change.
  • Before you sell, ask yourself this: does the stock have a poor outlook? Or do you want to sell because it of its share price fluctuations? If neither condition applies (and you just think it has gone up too far or too fast), then you should ask yourself if selling will improve your portfolio. Also ask yourself if you’re altogether willing to fiddle with the stock. It’s not only about knowing when to sell stocks, but also if you should even touch them.
  • Practice “dollar cost averaging.” Invest the same dollar amount on a regular basis. That way you’ll buy more shares when prices are low, and fewer when they’re high. In fact, if you invest a fixed sum at regular intervals throughout your working years, perhaps increasing that sum from time to time as your income rises, you can largely forget about market trends. If you factor in dividend payments, dollar cost averaging could make a huge difference to your long term profits. 

Share price fluctuations are nothing to lose sleep over, but they shouldn’t be completely ignored either. Investors should examine downturns in stocks they own and use every resource available to determine if action is needed. Note as well, that when it comes to more speculative holdings we think it does makes sense to sell half of your holdings in a speculative stock if it experiences a huge surge in price and more than doubles. Speculative and aggressive holdings are more volatile and may experience huge share price fluctuations.

How sensitive are you to share price fluctuations? Do you buy stocks when the market is rising? Or do you prefer to buy when the market is down and prices are lower? How has your approach worked out for you? Have you changed your approach over the years? Let us know what you think in the comments section.


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