TMCnet Feature
March 18, 2021

How Amateur Investors Should Respond to a Surge in the Stock Market

Amateur investors need to look at their personal tolerance for risk and their time horizon, as well as the quality of their portfolios, no matter whether the stock markets are rising or falling.

They need to be reasonable about their return expectations and not allow emotions to dictate their decisions. When the stock market surges, it is tempting to sell your stock but it is better to take your emotions out of the equation.

Don’t try to time the market

When the market soars, it is not necessarily the time to sell. One factor that can drive share prices higher is an increase in speculative buying of stocks by new and inexperienced investors.

They have limited investing knowledge and do not understand the risks involved. For example, buying equities based on social media tips is generally not a great idea, especially if the stock is hitting record highs.

When a significant number of inexperienced investors look at day trading as a way to make money in the short term, there is a good chance that many of them will lose their money. Alexander from suggests using a simulated trading platform with real-time data as the best way to get started, even if it is tempting to day trade immediately.

Stick to your long term strategy

Sometimes you will be able to buy stocks cheaply and other times, you will pay more for them. If this averages out over time, that’s a good long-term strategy. When you stick to a long-term strategy, you can avoid making emotion-driven decisions.

The stock market has always been volatile and investing over the long term allows you to ride out the highs and the lows. You need to remain calm when the stock market falls but you also need to avoid making emotional decisions when it surges.

Rebalance your portfolio

Don’t put off rebalancing your portfolio or the market might crash before you do so. Once the market crashes, it’s too late to change to more conservative assets. You could end up selling low. If you are trying to reduce your risk, the right time to rebalance is when stocks are high.

A surge in the market is the time to sell any stocks that are too risky for your tastes or that you’re bearish on. Sell while you’re ahead because even if the stock market is surging, it could plummet quickly.

Keep learning so you don’t just follow the crowd

The stock markets are complex adaptive systems and amateur investors need to keep improving their financial literacy. The more you can learn firsthand about risk management etc., the less likely you will be to have a herd mentality. You won’t sell or buy just because others are doing so but because you understand what you’re doing.

Trading is a profession like any other and it requires focusing on charts and other reliable sources of trading information. You need a plan about what to do and when to do it. You need to know the conditions that should be met before you open a trade.

Don’t be overconfident

Many amateur traders become too confident when they make a profit. They may open trades, make profits and assume it is easy to continue doing so. A professional trader knows that trading is not like gambling.

They understand the risks of losing money within seconds. This is why they never make hasty decisions and have good reasons for buying or selling. They will take time to reflect on their decisions and learn from their mistakes.

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