You log onto your brokerage account, or maybe a site like Personal Capital, and discover that one of your stocks took a beating today. Maybe it was down 10% on news of a recall. Whatever the case may be, the real question is what should you do?
Do you buy more, do you sell, do you just hold onto the position you have? Here are some factors that you should consider when deciding what to do.
Buy More When Stock Investments are Down
Many experts will tell you to buy more when a stock is down. This can be good advice, with the following big caution: why is the stock down?
Ask yourself, why did you buy this stock to begin with? Did you like the fundamentals of the business? Did the company have an awesome competitive advantage compared to it’s peers? Did you do a SWOT analysis of the company before you invested? If so, does the reasons you bought the stock still apply?
If the reasons that you bought a stock still apply, the you may want to consider buying more since you are getting a better price than when you first looked at the stock. Some common examples of why a stock may take a beating, but the business model doesn’t change, includes product recalls and natural disasters (think Japanese Tsunami). If you believe that the company can weather the short term storm, a buy on the down day may prove to be a great return in the end!
Sell Your Positions Now!
One of the first instincts when a stock takes a bath is to sell, and sell quickly! While this isn’t usually a good thing to do, there are some circumstances to consider selling. If the company is on the verge of bankruptcy, you should get out of your position. In bankruptcy, equity holders almost always lose.
Some other things to think about when looking to sell include the business model and corporate governance. Did the company suddenly lose it’s competitive advantage (think Monsanto and Chinese competition)? Did an accounting scandal just come to light (think Enron, which led to bankruptcy)? If something major changes in these areas, you should strongly consider selling your shares.
Ride It Out
Most of the time, however, you should probably just ride out the ups and downs. If nothing major changes, why buy or sell? Many times, stocks fluctuate with the entire market regardless of any company-specific news. However, if it goes down tremendously (think financial crisis) and there were no underlying business changes, you may want to invest more. However, just always be looking out for changes to your stock’s business. Those changes are what cause shareholders to take a beating.
Readers, when your shares are down, do you buy more, sell, or ride it out?