What To Do If Your Stocks Are All Falling
Generally speaking, a diversified portfolio can help protect you from volatility dragging down everything you own all at once. However, you may encounter a time when it seems everything you own is losing value. This can be due to anything from a negative turn in market sentiment to bad or unlucky stock picking.
If you find yourself in this unfortunate situation, don’t panic. There are some concrete steps you can take to help dig yourself out of a hole and set yourself up for future success. Here are a few.
Re-Examine the Base Investment Case
As much as everyone wants to believe they are the next Warren Buffett, the truth is that individual investors don’t have the greatest track record when it comes to picking specific stocks. For starters, individual investors don’t have access to the behind-the-scenes workings of individual companies. Perhaps even more importantly, however, is that picking individual stocks as winners is a tough job. Even Buffett himself, the so-called “Oracle of Omaha,” says that the best course of action for most investors is to buy and hold an S&P 500 index fund.
The bottom line — if you want to invest in individual stocks, you’ll have to do your homework. This is particularly true if your investments have turned sour. Dig through analyst reports, earnings releases and company news headlines to get a grasp on what exactly is happening at the companies you are invested in. For each stock you own, check to see if the company’s business prospects remain sound. This means earnings are expected to grow and/or recover in the future, valuation is fair and there are no long-term negatives dragging the business down.
Implement Dollar-Cost Averaging If Investment Case Is Sound
If a company’s investment thesis remains solid, you can usually ride out any temporary downdraft in a stock. Just bear in mind that even with solid underlying fundamentals, if sentiment has turned against a stock, a “temporary downdraft” may last weeks, months or even longer. However, over the long run, this can actually work to your advantage. By applying dollar-cost averaging back into the stock — meaning adding additional investments over regular time periods, such as weekly or monthly — you can pick up additional shares while the price is low, providing additional gains if and when the stock recovers.
Cut Your Losses If the Story Has Changed
If the base investment case for the stock has soured, however, you may have to pull the plug. As the old Wall Street axiom says, “Hope is not an investment strategy.” While it can be emotionally difficult to admit you made a mistake with a stock, clinging on to a position and hoping for it to recover can prove financially disastrous. As soon as it’s clear that the investment case for a stock has changed, it’s time to cut your losses and move on. As a parting gift, just remember that any time you sell a stock at a loss in a taxable investment account, you can use that loss to offset any taxable gains you may have, thereby reducing your tax bill.
Don’t Beat Yourself Up
Investing in individual stocks takes discipline and courage. Inevitably, a few — if not many — of your stock investments just aren’t going to work out. That’s just the nature of investing in the stock market. If you get emotional about a stock every time things don’t work out, then you’ll likely end up making poor investment choices. The first step to successful stock investing is to take emotion out of the equation and avoid beating yourself up when things don’t work out. As long as the majority of your investments are solid — or even if you’re able to pick a few big winners — then the losing positions you have won’t drag down your overall results too badly. Accept the fact that some of your positions are going to end up going down, and don’t get too down if you pick a few losers.
Get an Outside Opinion
If you’re making your own investment choices and can’t seem to get the results you desire, run your portfolio by an investment professional. Many financial advisors will give you a complimentary portfolio check-up and offer advice on how you might want to approach or fine-tune your investment choices. If you’re already working with a professional and aren’t seeing the results you desire, feel free to get a second opinion. At the end of the day, it’s important to make the best choices you can when it comes to your investments. Changing your approach if your performance is underwhelming can be an important step in getting you back on track.
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