Investors usually have an answer when it comes to rising markets. It’s when stock markets decline in a live scenario that they get nervous and confused about their next course of action. Should they buy more, sell everything, wait patiently? We share a detailed strategy on what to do when share prices fall.

When share prices fall, investors are usually anxious about their next move. At times, they make ill-conceived investment decisions and do the exact opposite of what they would do in when stock markets fall in a live environment.

First it pays to appreciate why stock market crashed and whether reasons are long-term or short-term in nature:

What makes share prices fall?

There can be various factors that lead to a dip in stock markets in a live scenario:

• Sudden onset of diseases all around the world.
• Upheaval in the Banking industry.

Fortunately, there are ways to side-step a share price fall and continue investing in a manner that maximizes long-term wealth creation.

Here are 4 things to do when share prices fall:

• Use the opportunity to buy more shares

If you have invested in a company with conviction over its fundamentals, then a stock market crash is really a godsend. You can make the most of the opportunity to accumulate the stock at every share price fall. Buying low and selling high is among the mainstays of successful investing. You also stand to benefit from rupee cost averaging.

Let’s say, you have invested in a stock at an average price of Rs 100. A falling market presents an opportunity to buy the stock at lower prices and decrease the average cost of purchase.

Let’s say, the share price falls consistently and you purchase it at every market fall @Rs. 90, @Rs. 80, @Rs. 70 - which reduces average cost of purchase to Rs. 85 from Rs. 100 at the start.

A share price fall works in your favour if you make the most of buying opportunities in your preferred stocks, thereby reducing average cost of purchase.

• Ideal entry point in stock markets

There are investors who are jittery about stock market investing because of the volatility or because they had forgettable experiences over the years.

Then there are some investors who look for value - i.e. when stocks are trading at discounts to their book value. For instance, a stock is trading at Rs. 200, while its book value is Rs. 150. A value investor may not show interest in the stock at Rs 200 because it is expensive compared to book value. When the stock falls below Rs. 150, the value investor may seem interested in buying since it is now trading at a discount to book value.

A share price fall is an ideal entry point in stock markets for a variety of reasons and investors should not lose the opportunity. Also, risk is lower, when it comes to investing in stocks that are trading at lows.

• Don’t be afraid to clean your portfolio

If you have invested in a company believing it to be an ideal fit in your portfolio only to be proved wrong, don’t be afraid to cut your losses or don’t wait indefinitely for share prices to correct so you can sell higher. It is possible that the stock has run its course or that it was a wrong decision to begin with, whatever the reasons may be, the investor should consider selling the stock and cut his losses instead of being emotionally attached to it. He should use the proceeds to invest in high conviction stocks.

• Re-balance your portfolio

A share price fall is an opportunity to review your asset allocation and re-balance the investment portfolio, if necessary. Asset allocation is about diversifying your investments across asset classes so that you are not over-exposed to a single asset like equities. Let’s say, your investment plan dictates that you divide your investments 40% in equities, 40% in fixed income or debt, 10% in cash and 10% in gold. Changes in share prices, either way - up or down, present an opportunity to revisit your portfolio and make suitable adjustments.

For instance, if share prices fall, your equity allocation will drop from 40% to a lower level. You may need to bring it up to 40% by selling off another asset that has risen in value and use the proceeds to buy more stocks, to restore the original asset allocation (40% in equities).

A fall in share prices, as we have seen, could be just what you need - be it to correct your asset allocation or clean your portfolio or lower your average cost of purchase or hunt for value investments. It is an opportunity that should not be missed.