The best way for small cap investors to avoid the pressure to sell is to buy right.

Since the beginning of summer the small cap market has been in a steady decline mode.

Is the decline in small cap stock prices the result of domestic economic uncertainty? Or is it due to the slower than expected growth in China? Maybe it is geo-political factors from the Ukraine situation or terror threats from ISIS. The point is that nobody definitely knows what exactly is driving the negative market sentiment.

But one thing is for sure: With all the uncertainty, small cap stock prices have been heading lower and trading volumes have been on the decline. At this time the market has an aversion to risk and risk is what small cap stocks inherently have.

Will this trend change? Invariably the answer is yes.

When? It could be tomorrow, next week or maybe not until next year. Nobody knows that answer.

That said the continuation of current market conditions may have some investors losing substantial money on their small cap stock investments. Those investors are now faced with a difficult decision: Should they cut their losses and sell out or wait for the market to turn, with the hope to recoup the losses from the slide in small cap stock prices?

Investors can avoid the decision to sell their small cap stocks at a loss when markets decline if they buy right.

Here are our 3 simple rules:

When you buy right, you don’t buy a small cap stock just because it operates in a trendy industry or its share price has had upward momentum. In either case the stock price is most likely already trading at a lofty valuation level which is not sustainable during market downturns.

Buying right is investing in a small cap stock with a strong balance sheet; preferably a company that has lots of cash and little or no debt. During times of market weakness, small companies that have no need for financing have share prices that are much less volatile and do not decline nearly as much.

Avoid making buying decision solely based on a recommendation from an investment advisor. When it comes to small and micro cap stocks, most fund managers do not have much better insight in their valuation levels or determining their future success. Do your own research too.

The market downturn has caused pain for some investors but lower stock prices for small caps are starting to create new investing opportunities too. If you buy right!

Read Disclaimer: